By: Lee David Medinets, Esq., Chief Counsel, MCRES, Madison Exchange a/k/a Madison 1031, and affiliates
In the last few posts, we looked at how parking arrangements are handled in reverse exchanges. Construction exchanges are in some ways very similar to reverse exchanges. Both involve a parking arrangement. In a construction exchange, however, the purpose of the parking arrangement is different.
IRC § 1031 allows for the cost of construction on replacement property to be counted as part of the purchase price of that property, but only to the extent that the improvements have been made to the property before the taxpayer acquires it. Once the taxpayer owns the replacement property it is too late. Moreover, payment for bricks and mortar sitting at the construction site does not count for exchange purposes until those bricks and mortar have been attached to the ground. The cost of services performed for construction counts, but not the cost of services that have not yet been performed. In a construction exchange, the parking arrangement allows these improvements to be made while the property is in the hands of a friendly party. Continue reading
Tags: 1031 Exchange, accommodation party, construction exchange, EAT, exchange accommodation titleholder, indicia of ownership, Internal Revenue Service, IRC §1031 like-kind exchange, IRS, like kind property, relinquished property, replacement property, Revenue Procedure 2000-37, reverse exchange, safe harbor, substantial indicia of ownership, Treasury Regulations
By Lee David Medinets, Esq., Chief Counsel, MCRES, Madison Exchange a/k/a Madison 1031, and affiliates
In my last post, we looked at how a safe harbor reverse exchange works under Rev. Proc. 2000-37. Either the relinquished property or the replacement property is “parked” with an “exchange accommodation titleholder” or “EAT”. We also discussed the restrictions on a safe harbor reverse exchange that must be included in a “qualified exchange accommodation agreement” (a “QEAA”) in order to have the benefit of the safe harbor. In this post we will examine the difference between parking a replacement property versus parking a relinquished property.
There are usually some significant advantages to parking the replacement property instead of the relinquished property. Here are five advantages. Continue reading
Tags: 1031 Exchange, accommodation party, agent of the taxpayer, construction exchange, due on sale clause, EAT, exchange accommodation titleholder, indicia of ownership, Internal Revenue Service, IRC §1031 like-kind exchange, IRS, like kind property, limited liability company, qualified exchange accommodation agreement, relinquished property, replacement property, Revenue Procedure 2000-37, reverse exchange, safe harbor, single purpose entity, SPE, substantial indicia of ownership, Treasury Regulations
By Lee David Medinets, Esq., CES®, Chief Counsel, Madison Exchange, LLC
A “Construction Exchange” is a special type of tax-deferred IRC § 1031 like-kind exchange that allows a taxpayer to defer recognizing income by sheltering proceeds from the sale of relinquished property into improvements made to replacement property, not just in the cost of buying the replacement property (as in an ordinary “forward exchange”). In order for a construction exchange to work, the taxpayer cannot own the property at the time the im-provements are made. In a typical safe-harbor construction exchange [Rev. Proc. 2000-37], the replacement property is purchased from a third-party seller on behalf of the tax-payer by an exchange accommodation titleholder (“EAT”). The EAT is essentially acting as the taxpayer’s agent under a contract that allows the taxpayer to use and improve the re-placement property during the taxpayer’s 180-day exchange period. By the end of the ex-change period, the EAT transfers legal ownership of the replacement property to the tax-payer, which completes the exchange.
One common problem is that a safe-harbor construction exchange will not work if the tax-payer owned the replacement property within 180 days of the start of the exchange. [Rev. Proc. 2004-51.] What if the replacement property is owned by a related party, such as a multi-member LLC that the taxpayer controls? There has been some concern that such an exchange might fail to qualify as a safe-harbor construction exchange because ownership of the replacement property by the related party would be viewed by the IRS as the equivalent of ownership by the taxpayer himself/herself. IRS Private Letter Ruling 201408019, issued February 21, 2014, addressed this precise issue. Continue reading
Tags: construction exchange, EAT, exchange accommodation titleholder, forward exchange, IRC §109, IRS Private Letter Ruling 201408019, landlord, long-term ground lease, relinquished property, replacement property, taxpayer, tenant, §1031 exchange, §1031 Like-Kind Exchange