6B — July 14 - 27, 2017 — Southern New Jersey — M id A tlantic
Real Estate Journal
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S outhern N ew J ersey
By Michael Benguigui, CPA, Sax LLP Can I buy first and sell later in a Like-Kind Exchange?
R
eal Estate investors are always on the search for creative tax planning
ment property. In a typical Like-Kind De- ferred Exchange involving real estate, the investor would use the services of a Quali- fied Intermediary (“QI”) who acts as a neutral party to sell the relinquished property to a third-party buyer. The QI would then hold the funds in an escrow account which is out of reach of such investor. The proceeds from the sale of the relinquished property would then be used to purchase the replacement property, and complete the Forward Like- Kind Exchange.
As a general rule, in order to qualify for 100% tax-deferral, the equity and the mortgage in the replacement property must be equal to or greater than the equity and the mortgage in the relinquished property. Other- wise, the investor would need to recognize the capital gain. Over time, real estate in- vesting expanded the use of Like-Kind Exchange by introducing the concept of a Reverse Exchange, that is, the replacement property is acquired before the disposition of the relinquished property. As a response to this evolu-
tion, the Treasury Department published Revenue Procedure 2000-37 to address Reverse Like-Kind Exchanges and provide a safe harbor in which they would not be challenged. The Revenue Procedure 2000-37 established the role of an “Exchange Accommoda- tion Titleholder” (EAT) which will acquire the replacement property, and hold it for a pe- riod of not more than 180 days. The investor must identify relinquished property within 45 calendar days after the close of the replacement property transaction. Further, the EAT
and the real estate developer must execute a formal written document called, a Qualified Exchange Accommodation Agreement (QEAA). This describes the role of the EAT and the compliance needed to be within the safe harbor. Notably, the EAT is the owner of the replacement property for Federal income tax purposes at all times from the date of acquisition until the closing of the Reverse Exchange. An EAT can also perform the services of the QI as part of a Reverse Exchange, as cited under Rev. Proc. 2000- 37, Section 4.03(1). There are two manners to structure a Reverse like Kind Exchange – “Exchange Last” and “Exchange First” – yet the latter is much less used in practice. In an “Exchange Last” Reverse Exchange, the investor enters into a QEAA with an EAT and first as- signs the purchase and sale contract for the acquisition of the replacement property. The EAT acquires the replacement property directly from a third party seller, and enters a triple net lease with the real estate investor to use the property. When the investor’s relin- quished property is ready to be sold to a third party buyer, the investor will assign the purchase and sale contract to a QI. The QI will obtain the proceeds from the sale of the relinquished property, and simultaneously acquire the replacement property held by the EAT. The EAT will then pay off the investor (or any outstanding third party loans), and transfer title of the re- placement property to the real estate investor. Simple right? Under the previous Obama and current Trump adminis- trations, policymakers have proposed various degrees of the Section 1031 application, from limiting it to eliminat- ing it all together to help close the budget gap. Like-Kind Exchanges involve significant complexity and an uncertain future. If you are in the midst of an exchange or contemplat- ing entering one, take care to enlist the support and guid- ance of an experienced finan- cial advisor to help navigate the process. Michael Benguigui, CPA is a senior manager at Sax LLP and a member of the firm’s Real Estate Industry Services Group. n
opportunities to defer their tax bill for as long as pos- sible. Section 1031 of the Internal Rev- enue Code is a powerful tool that al-
Michael Benguigui
lows for the disposal of an as- set without generating a tax liability from the sale, as long as the proceeds are used to purchase a like-kind replace-
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