In an effort to defer the payment of capital gains taxes, a taxpayer may choose to enter into a Section 1031 Exchange in lieu of a traditional sale of property. A Section 1031 Exchange may be used by a corporate entity as well as by an individual taxpayer; however, the rules for qualifying a transaction for a 1031 Exchange become more complicated as the entities involved become more complex. In IRS PLR 201242003, the IRS considered whether Section 1031 applies in a transaction in which the taxpayer and a related party both entered into separate qualified exchange accommodation agreements to park the same property held by a single exchange accommodation titleholder.
The relationship between the parties involved was as follows:
Trust is a State A trust, classified as a real estate investment trust (REIT) for federal income tax purposes. Taxpayer is a State B limited partnership and Affiliate is a State A limited partnership. Trust owns approximately 95.6 percent of Taxpayer and is its sole general partner. Outside partners own the remaining 4.4 percent of Taxpayer. Taxpayer owns 99 percent of Affiliate. QRS, a State B corporation, owns the remaining 1 percent in Affiliate. Because Trust owns 100 percent of QRS, QRS is a qualified REIT subsidiary and a disregarded entity for federal income tax purposes under § 856(i).
Both Taxpayer and Affiliate owned numerous multi-family residential apartment properties. Both Taxpayer and affiliate wished to purchase a property (hereinafter referred to as “Property”) as replacement property through separate 1031 Exchange transactions. Because neither Taxpayer nor Affiliate had a property ready to relinquish when the owner of Property wanted to close on the deal, both Taxpayer and Affiliate entered into a qualified exchange accommodation arrangement (QEAA) with EATX, an exchange accommodation titleholder in order to facilitate a reverse 1031 Exchange.
Taxpayer’s QEAA included provisions that stated Taxpayer’s right to acquire Property was subject to it giving notice to EATX of its intention to acquire Property, in whole or part as well as a proviso that the Taxpayer’s rights terminate upon prior delivery of such notice by Affiliate. In addition, if Affiliate gives notice of its intent to acquire Property then EATX has no further obligation to transfer property to Taxpayer but if Affiliate states its intention to acquire only a portion of Property then EATX’s obligation to transfer the balance of Property to Taxpayer is unaffected. Affiliate’s QEAA included reciprocal provisions with regard to Taxpayer.
The transaction in question occurred as follows:
On Date 1, EATX acquired title to Property using funds that Taxpayer advanced. On Date 2 (which was within the 45-day identification period) Taxpayer and Affiliate each identified property that each proposed to transfer as relinquished property according to terms of its respective QEAA with EATX. Taxpayer identified three potential relinquished properties and Affiliate identified one. Prior to Date 3, Taxpayer’s qualified intermediary sold RQ (one of the three properties Taxpayer identified as potential relinquished property). On Date 3 as provided in Taxpayer’s QEAA, EATX transferred Property to Taxpayer to complete Taxpayer’s exchange.
In its analysis of the facts, the PLR concluded that EATX may enter into QEAAs with more than one entity even if the entities involved are related to each other if each entity has a bona fide intent to acquire the same property for their planned Section 1031 Exchange transactions. Furthermore, an accommodation party is not prohibited from serving as an EAT to multiple taxpayers under multiple and simultaneous QEAAs for the same parked property. Under the facts of the case as set forth in PLR 201242003 the ruling was that each planned transaction was a separate and distinct transaction even though the parties were related, the QEAAs were with the same EAT, and the same property was the subject of both agreements.
For a complimentary consultation with a Certified Exchange Specialist© or to ask a question, click on the button below and receive a response within 12 hours.
