miller nash llp | Fall 2014 brought to you by the tax law practice team Tax-Free Exchange Advisor More Flexibility for Reverse Exchanges but replaces that risk with the fact that The facts of Private Letter Ruling the exchange will fail if the taxpayer 201416006 can be illustrated as follows. cannot find someone to buy his or her Leonard owns three duplexes and also by Jeneé Hilliard relinquished property within the 180-day owns 51 percent of the Howard Leonard jenee.hilliard@millernash.com period. This structure also requires that Partnership and 51 percent of the Shel- 503.205.2505 the taxpayer have the cash and financ- don Leonard Partnership. Each of the When the real estate market is hot, it ing available to acquire the replacement partnerships also owns three duplexes. can be a great time to sell real property. property before the relinquished prop- Leonard finds the apartment complex And because people don’t want to pay tax erty is sold; for many taxpayers, this is a and wants it to serve as replacement unless they have to, it can be attractive difficult hurdle to overcome. property for whichever of the nine to complete a 1031 exchange with the pro- duplexes sells first. Leonard has an A typical reverse exchange can be il- ceeds from the sale. But a hot real estate EAT acquire the apartment complex as lustrated as follows. Our taxpayer, Leon- market can be a difficult time to buy real potential replacement property. He then ard, finds an apartment complex that he’d estate, and if a taxpayer sells real estate, enters into three QEAAs with the EAT. like to buy as investment property, and it doesn’t necessarily mean that accept- One QEAA is with Leonard personally, he also wants to sell his current invest- able replacement property can be found one QEAA is with the Howard Leonard ment duplex without paying tax. Leonard within the timelines required by Section can sign a QEAA and have an EAT buy (continued on page 5) 1031. Private Letter Ruling 201416006, the apartment complex for him, and issued earlier this year, provides a little then Leonard can list his duplex for sale. additional flexibility for taxpayers with If the duplex sells within 180 days after inside this issue multiple real estate holdings who com- the apartment complex is purchased, he 2 Many Related-Party plete a reverse 1031 exchange. can complete the exchange and have the Exchanges Are Perfectly Reverse exchanges are typically Legal apartment complex serve as replacement accomplished by complying with the property for his duplex. But if Leonard 2 Jeneé Hilliard Named Editor “parking” rules in Revenue Procedure has multiple duplexes, owns them 2000-37. In a typical reverse exchange, 3 Exchanges and Single- through various partnerships, and is Member LLCs a taxpayer will enter into a qualified willing to sell any of the duplexes as part exchange accommodation agreement (re- of a 1031 exchange, it increases Leonard’s 4 Exchanging Adjacent ferred to as a “QEAA”) with an exchange Parcels: One Exchange or chances of completing a 1031 exchange Two? accommodation titleholder (referred to as if he can use whichever duplex sells an “EAT”; this role is typically played by a first as the relinquished property in an single-member limited liability company exchange with the apartment complex. formed by the 1031 accommodator). This Private Letter Ruling 201416006 has approach can be used to ensure that the opened the door to allow more flexibility taxpayer isn’t under any time pressure to in designating relinquished property in find and purchase replacement property, reverse exchanges. www.millernash.com
Many Related-Party Exchanges Are Perfectly Legal! buy the house from Sally’s husband, Another exception is that a taxpayer Clyde, since Clyde is not related to Joe can transfer his relinquished property in such a way that it triggers the related- to his child or other related party and by Ronald A. Shellan party rules. Of course, if Sally transfers acquire the replacement property from ronald.shellan@millernash.com the house to Clyde the day of closing so an unrelated person. It works, and there 503.205.2541 Clyde can sell it to Joe, the IRS can ar- is no risk, as long as both the taxpayer gue that in essence it is a related-party and the related party hold the replace- In the good old days, a taxpayer transaction. But if Sally transfers the ment property and the relinquished could exchange his high-basis relin- house to Clyde, waits a month or two, property respectively for at least two quished property for his wife’s low- and there is no agreed-on plan that the years. Thus, while you generally cannot basis replacement property. Thereafter, house will be purchased by Joe, it will complete an exchange by acquiring the the taxpayer could sell the replacement probably pass IRS muster. replacement property from a related property (which now has a substituted person, you can complete an exchange high basis) with little or no gain. This Another exception relates to situa- by selling the relinquished property to technique is known as a basis swap. tions that in effect have no basis swap. a related party. Years ago, Congress changed the law Thus, Joe can complete an exchange by to plug the basis-swap loophole by ban- purchasing the replacement property Another work-around is to acquire ning many related-party exchanges. from his daughter Sally, a transaction the replacement property from a related But one can still complete many types that is generally not allowed, provided party who does not technically meet the of exchanges with related parties! that Sally’s taxable gain on the trans- requirements for being a related party action is roughly equal to the gain under the tax rules. Let’s say that Joe The law actually allows tax-free that Joe will defer by completing the wants to help out his daughter Sally exchanges with related parties if both exchange. Thus, there is no basis swap, by buying her house as replacement the taxpayer and the related party hold since someone within the related fam- property in a tax-free exchange and on to the properties received in the ily group is paying taxes; Uncle Sam is financing the purchase by selling relin- exchange for two years. But obviously, happy! Note, however, that if Sally has quished property that he owns to a third that exception has only limited utility. a net operating loss and won’t pay taxes party. While he can’t do that, he could Who can wait two years? (continued on page 5) Jeneé Hilliard Named Editor Search Miller Nash LLP SHARE Engaged Guidance, Exceptional Counsel. partner Jeneé Hilliard EXPERIENCE • PRACTICE TEAMS has been named editor of the Tax-Free Exchange Tax Advisor . Ronald Shellan Attorneys in Miller Nash’s tax practice represent clients ranging from national companies to indi- viduals and closely held businesses. We add value by helping our clients plan their business and is stepping down as editor investment activities to attain their business objectives while minimizing their local, state, and fed- in anticipation of his retirement this eral taxes. Our tax attorneys deal with the Internal Revenue Service, the Oregon Department of Revenue, and the Washington Department of Revenue, as well as many local governments, and December. Jeneé, whose primary prac- are actively involved with local, state, federal, and international tax issues. Additionally, Miller Nash represents national, regional, and local companies in administrative hearings and in state and fed- tice focus is on real estate and tax-free eral courts in tax disputes with revenue authorities. exchanges, has worked for almost a de- Miller Nash tax attorneys are recognized leaders in their fi eld, from having served (or serving) on cade in the tax-free exchange arena. She Practice Leader: the executive committee of the Oregon State Bar’s Tax Section (three as its chair) and from being is currently finalizing the “Like-Kind regular speakers at a variety of industry and professional seminars. Our tax attorneys work behind William S. Manne the scenes on legislative and regulatory matters and represent clients through all stages of appeals Exchanges” chapter in the Principles bill.manne@millernash.com and in tax court. Tax of Oregon Real Estate Law handbook published by the Oregon State Bar . learn more about our tax team at W W W . M I L L E R N A S H . C O M Tax 2 | miller nash llp | Tax-Free Exchange Advisor
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