Revenue Procedure No. 2000-37 (PDF)
The Revenue Procedure provides a safe harbor under which the Service will not challenge reverse exchange transactions if they are structured within the parameters of the Revenue Procedure.
Qualified Exchange Accommodation Agreement (QEAA)
The Taxpayer must enter into a written QEAA with the EAT within five (5) business days of the date either Relinquished or Replacement Property is parked with the EAT. Property is deemed to be held in a QEAA if the following requirements are met:
Qualified Indicia of Ownership
Qualified Indicia of Ownership is held by someone other than the Taxpayer or a disqualified person (i.e. the EAT) who is subject to federal income tax.
Qualified Indicia of Ownership can be demonstrated by:
- Legal title held by the EAT;
- Other indicia of ownership such that the EAT is treated as the beneficial owner of the property, as in a contract for deed; or
- A single member LLC that holds legal title to the property (or some other entity that is disregarded for federal income tax purposes), the membership interest of which is owned by the EAT.
At the time the property is transferred to the EAT, the Taxpayer must have bona fide intent that the property represents either Replacement Property or Relinquished Property that is intended to qualify for non-recognition of gain under Section 1031.
The QEAA must specify:
- The EAT is holding the property for the benefit of the Taxpayer to facilitate a 1031 exchange; and
- The EAT is the beneficial owner of the property; and
- The parties must report ownership of the property as such for federal income tax purposes.
Within 45 days after the Replacement Property is parked with the EAT, the Taxpayer must identify the Relinquished Property to be transferred in the forward exchange. The identification must be made in a manner consistent with the Treasury Regulations (i.e, the “three-property rule or the “200% rule”).
Within 180 days after Property is parked with the EAT, Parked Replacement Property must be transferred to the Taxpayer as Replacement Property or Parked Relinquished Property must be transferred to a third party purchaser. If the Taxpayer is unable to sell the Relinquished Property within 180 days of parking Property, the Parked Property is returned to the Taxpayer and the exchange will fail to qualify under Code Section 1031.
Non-Arms Length Agreements
The Revenue Procedure allows the Taxpayer and EAT to enter into a number of non-arms length agreements during the time that the property is parked with the EAT. These agreements allow the Taxpayer to manage and control the property during the parking period, and relieve the EAT of liabilities associated with property acquisition, ownership and disposition. The Revenue Procedure provides the following:
- A: Taxpayer can loan funds to the EAT to acquire Replacement Property or guarantee third party financing.
- B: Taxpayer can indemnify the EAT against costs and expenses.
- C: Taxpayer can lease the parked property from the EAT.
- D: Taxpayer can manage the property, oversee improvements, act as contractor, and provide services to the EAT.
- E: Taxpayer and the EAT can enter into agreements arranging for the purchase or sale of the property, including puts and calls, effective for a period not to exceed 185 days from the date the EAT acquires the property.
- F: Taxpayer and the EAT can enter into an agreement to deal with fluctuations in the price of the property during the period of time the property is parked with the EAT.