Article: Reverse Like-Kind Exchange


	Jim Schmidt

The reverse like-kind exchange

Secure the replacement property before you give up yours

The IRS has issued a revenue procedure (Rev. Proc. 2000-37; IRB 2000-40) describing a safe harbor approach to a reverse like-kind exchange, a nifty exchange technique that allows you to secure the replacement property before giving up the property you own.

The IRS realized taxpayers were engaging in “parking” transactions to facilitate reverse like-kind exchanges. Parking transactions typically are designed to “park” the desired replacement property with a middleman or “accommodation party” until such time as the taxpayer arranges for the transfer of the relinquished property to the ultimate transferee in a simultaneous or deferred exchange.

Once such a transfer is arranged, the taxpayer transfers the relinquished property to the accommodation party in exchange for the replacement property, and the accommodation party then transfers the relinquished property to the ultimate buyer.

In other situations, an accommodation party may acquire the desired replacement property on behalf of the taxpayer and immediately exchange such property with the taxpayer for the relinquished property, thereafter holding the relinquished property until the taxpayer arranges for a transfer of such property to the ultimate transferee.

Example. You have a chance to purchase a strip mall. The opportunity won’t last long. In order to do the deal you’ll have to sell a small office building in which you have a large capital gain. But you won’t be able to find a buyer to take your property before the opportunity to purchase the replacement property (the strip mall) expires. In addition, you want to do a like-kind exchange.

You have an accommodation party purchase the strip mall and hold it for you while you find a buyer for the office building. You then transfer the office building to the accommodation party, who sells it to the ultimate buyer. The accommodation party then transfers the strip mall to you.

The revenue procedure cited above provides a safe harbor for a reverse like-kind exchange if all the requirements are met. The IRS calls an exchange using such an intermediary as a “qualified exchange accommodation arrangement” (QEAA).

Qualifying as a QEAA requires meeting six conditions:

Qualified indicia of ownership of the property must be held by the exchange accommodation titleholder who is not the taxpayer or a disqualified person. Thus, the accommodation party must have legal title to the property and must be treated as the beneficial owner of the property.
At the time that title is transferred to the exchange accommodation titleholder, you must have a bona fide intent to effect a like-kind exchange.
No later than five business days after the transfer of title to the exchange accommodation titleholder, you and the exchange accommodation titleholder must enter into a written agreement that provides he is holding the property in order to facilitate a like-kind exchange.
No later than 45 days after the transfer of qualified indicia of ownership of the replacement property, the relinquished property is properly identified.
No later than 180 days after the transfer, (a) the property is transferred through a qualified intermediary to you as replacement property or (b) the relinquished property is transferred.
The combined time period that the relinquished property and the replacement property are held in the QEAA does not exceed 180 days.

Conclusion. Though complicated, the reverse like-kind exchange offers greater flexibility and more options in obtaining the desired tax advantages.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.