The Starker Reverse Exchange

Safe Harbor

Reverse-Starker transactions, in which the replacement property is acquired before the relinquished property is transferred, are not covered by the like-kind exchange regulations under Section 1.1031(k)-1, and thus do not qualify as tax-free exchanges (Rev Proc 2000-37). To circumvent that problem, taxpayers use parking arrangements, whereby a replacement property is parked with a third party until the taxpayer transfers the property the taxpayer wishes to relinquish, or 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, although the IRS recognizes that parking transactions outside of these safe harbor rules may still qualify. If these rules are not complied with, however, the safe harbor will not apply and determinations of who is the owner of the property for federal income tax purposes, as well as the proper treatment of any transactions by or between the parties to the exchange, are made without regard to the safe harbor. For example, if the property is not transferred within the time required, the safe harbor rules will not apply.

If property is held in a qualified exchange accommodation arrangement (QEAA), the IRS will not challenge whether the property qualifies as replacement property or relinquished property under Section 1.1031(k)-1(a) or whether the exchange accommodation titleholder qualifies as the beneficial owner of the property (Rev Proc 2000-37 , Sec. 1, 2000-2 CB 308).

Exchange Accommodation Titleholder of Property Held in a QEAA

For purposes of the safe-harbor rules, the exchange accommodation titleholder (EAT) is a person who is not the taxpayer (i.e. not the person seeking tax deferral for the exchange) or a disqualified person, and is either subject to federal income tax or, if the EAT is treated as a partnership or S corporation for federal income tax purposes, more than 90% of its interests or stock are owned by partners or shareholders who are subject to federal income tax. Services for the taxpayer in connection with a person's role as the EAT in a qualified exchange accommodation arrangement are not taken into account in determining whether that person or a related person is a disqualified person under Section 1.1031(k)-1(c)(4).

Disqualified Persons

For purposes of the rules relating to eligiblity to serve as escrow holder of a qualified escrow account or as a trustee of a qualified trust for purposes of the safe harbor rules, a “disqualified person” is defined as:

  • a person who is the agent of the taxpayer at the time of the transaction;
  • certain persons related to the taxpayer; or
  • certain persons related to the taxpayer's agent.