IRS Approves 1031 Exchange Involving 2 Related Parties

Private Letter Ruling 201242003 addresses a relatively creative situation involving two related parties that both intended to acquire the same replacement property in accordance with IRC Section 1031 and also Revenue Procedure 2000-37. In PLR 201242003, the IRS permitted tax deferral under Section 1031 even though the Exchange Accommodation Titleholder (EAT) entered into Qualified Exchange Accommodation Arrangements (QEAAs) with more than one entity, including entities related to the taxpayer, who both had a bona fide intent to utilize a reverse exchange format to defer capital gain taxes. PLR 20122003 notes that Rev. Proc. 2000-37 does not prohibit an EAT from functioning as an EAT to more than one taxpayer under multiple QEAAs for the same parked exchange property.

For the full private letter ruling, click on PLR 201242003.

Important information for investors beginning a 1031 exchange
from October 18 – December 31, 2012

The time frame an exchanger has to complete the acquisition of a replacement property in a 1031 exchange ends at midnight on the earlier of the 180th day after the date the relinquished property was transferred – or – the due date (including extensions) for the income tax return for the taxable year in which the transfer of the relinquished property occurs. (U.S. Treasury Regulations section 1.1031(k)-1(b)(2)). Even though an exchanger may be entitled to the granting of a tax extension, they must actually file IRS Form 4868 with the IRS to obtain the tax extension. Consequently, some exchangers closing late in 2012 may need to file to obtain this extension to have the benefit of the entire 180 day exchange period. As a general rule, exchangers should not file a 2012 Federal income tax return until the 1031 exchange is complete.

More specifically, if the 180th day following the closing of the first relinquished property falls after the due date for filing the 2012 tax return (generally April 15, 2013 for individuals), an exchanger must file IRS Form 4868 with the IRS to actually extend the filing date. If an exchanger does not file for such an extension, they will not be able to acquire any replacement property in an exchange after the tax return due date.

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