Parking Arrangements in Construction Exchanges and for Other Purposes

Tag Archives: safe harbor

October 28, 2015

Parking Arrangements in Construction Exchanges and for Other Purposes

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 Comments Off

October 14, 2015

Parking Arrangements in Reverse Exchanges – Part 3

Lee David Medinets, Esq.

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 Comments Off

September 24, 2015

Parking Arrangements in Reverse Exchanges – Part 2

Lee David Medinets, Esq.

Lee David Medinets, Esq., Chief Counsel, MCRES, Madison Exchange a/k/a Madison 1031, and affiliates

In the last post, we began to examine the problem of what to do when a taxpayer needs to buy an IRC Section 1031 like-kind exchange replacement property before the relinquished property in that exchange can be sold. This is called a “reverse exchange” because it proceeds in the opposite direction from the common forward exchange where the relinquished property is sold first. The reverse exchange process creates a special problem in that the taxpayer cannot simultaneously own both the relinquished property and the replacement property. In a reverse exchange, either the relinquished property or the replacement property must be “parked” with some relatively friendly third-party until the relinquished property is sold.

We also examined why traditional non-safe harbor reverse exchanges are expensive, risky and rare. On the other hand, traditional non-safe harbor exchanges have the substantial advantage that there is no theoretical limit to how long a potential replacement property could be parked. In order to inject some certainty into the reverse exchange process and in order to encourage reasonable time limits on that process, the IRS has offered an alternative by creating a safe harbor in Revenue Procedure 2000-37. Continue reading →

Tags: 1031 Exchange, accommodation party, agent of the taxpayer, delayed exchange, EAT, exchange accommodation titleholder, forward exchange, 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, substantial indicia of ownership, Treasury Regulations Comments Off

September 9, 2015

Parking Arrangements in Reverse Exchanges – Part 1

Lee David Medinets, Esq.

By Lee David Medinets, Esq., Chief Counsel, MCRES and Senior Counsel, Madison Exchange, LLC a/k/a Madison 1031 and their affiliates

IRC §1031 like-kind exchanges are popular, reliable, IRS-approved transactions that allow taxpayers to defer paying taxes on profits when property (usually real estate) that is held for productive use in trade or business or for investment is exchanged for like-kind property (e.g., real estate exchanged for real estate) that will also be held for productive use in trade or business or for investment.

In a typical IRC §1031 exchange, the taxpayer sells relinquished property through a qualified intermediary (a “QI”) and later acquires replacement property through the same QI. If the process is handled in accordance with Treasury Regulations, it is considered as if the taxpayer exchanged the relinquished property for the replacement property. This process is commonly referred to as a “forward” exchange because it proceeds in the normal direction – sell first, buy second. However, sometimes a taxpayer needs to buy the replacement property before the relinquished property can be sold. This is called a “reverse exchange” because it proceeds in the opposite direction from a forward exchange.

A reverse exchange poses a special problem. The taxpayer cannot simultaneously own both the relinquished property and the replacement property. That would make it impossible to exchange one property for the other. Therefore, in a reverse exchange, either the relinquished property or the replacement property must be “parked” with some relatively friendly third-party until the relinquished property is sold. Continue reading →

Tags: 1031 Exchange, accommodation party, agent of the taxpayer, delayed exchange, forward exchange, Internal Revenue Service, IRC §1031 like-kind exchange, IRS, like kind property, limited liability company, relinquished property, replacement property, Revenue Procedure 2000-37; non-safe harbor exchange, reverse exchange, safe harbor, Treasury Regulations Comments Off