The Safe Harbor of a Deferred Exchange
Qualified Exchange Accommodation Arrangement (QEAA) Safe Harbor
A reverse exchange, in which the replacement property is acquired before the relinquished property is transferred, is not covered by the like-kind exchange regulations and does not qualify as a tax-free exchange. To circumvent that problem, taxpayers use a “parking” arrangement: a replacement property is parked with a third party until the taxpayer transfers the property to be relinquished; alternatively, the relinquished property is parked with the third party, who holds it until a transferee is identified. These transactions are arranged so that the third party, or the “accommodation party”, is treated as the owner of the replacement or relinquished property for federal income tax purposes. Safe harbor rules in an IRS revenue procedure allow these accommodation transactions to qualify as like-kind exchanges.
Property is considered to be held in a qualified exchange accommodation arrangement if all of the following conditions are satisfied:
- An exchange accommodation titleholder must hold qualified indicia of ownership of the property at all times from the date the titleholder acquires the property until the property is transferred as described in (5) below.
- When the qualified indicia of ownership of the property are transferred to the titleholder, the taxpayer (the party seeking tax deferral treatment) must have the bona fide intent that the property held by the titleholder represents either replacement property or relinquished property in an exchange that is intended to qualify for nonrecognition of gain (in whole or in part) or loss under Section 1031.
- No more than 5 business days after the qualified indicia of ownership of the property has been transferred to the titleholder, the taxpayer and the titleholder must enter into a written QEAA that provides that:
Both parties must report the federal income tax attributes of the property on their federal income tax returns in a manner consistent with the agreement. But property will not fail to be treated as being held in a QEAA merely because the accounting, regulatory, or state, local, or foreign tax treatment of the arrangement between the taxpayer and the titleholder is different from the treatment required by the rules at footnote 35 in this paragraph 3.
- the titleholder is holding the property for the taxpayer's benefit to facilitate an exchange under Section 1031 and Revenue Procedure 2000-37;
- the taxpayer and the titleholder agree to report the acquisition, holding, and disposition of the property as provided in Rev Proc 2000-37; and
- the agreement must specify that the titleholder will be treated as the beneficial owner of the property for all federal income tax purposes.
- No more than 45 days after the qualified indicia of ownership of the replacement property have been transferred to the titleholder, the relinquished property must be properly identified, as provided in Section 1.1031(k)-1(c). The taxpayer may also properly identify alternative and multiple properties, as described in Section 1.1031(k)-1(c)(4).
Observation: Section 1.1031(k)-1(c) (footnote 36) requires the identification of the replacement property, not the relinquished property, within 45 days of the transfer of the relinquished property, not within 45 days of the transfer of the replacement property. Presumably, the inversion of these terms in Revenue Procedure 2000-37 is deliberate in that the Rev Proc is intended to enable taxpayers to accomplish a reverse exchange by “parking” the replacement property until they have acquired the property to relinquish in the exchange.
- No more than 180 days after qualified indicia of ownership of the property have been transferred to the titleholder (a) the property must be transferred to the taxpayer as replacement property (either directly or indirectly through a qualified intermediary (defined in Section 1.1031(k)-1(g)(4)) ; or (b) the property must be transferred, as relinquished property, to a person who is not the taxpayer or a disqualified person; and
- The combined time period that the relinquished property and the replacement property are held in a QEAA must not exceed 180 days.