Reverse 1031 exchanges are a great option for taxpayers who wish to acquire replacement property before selling their relinquished property. But what happens if, for whatever reason, your reverse exchange is in jeopardy? In this article, we are going to offer up a creative alternative option for a failing reverse 1031 exchange.
A Creative Alternative
A creative option for a failing reverse exchange can be found in IRS Private Letter Ruling 200712103.
Assume that you are parking your new replacement property with the Exchange Accommodation Title Holder. In the event that an actual third-party purchaser can’t be found to purchase your relinquished property (the old property) within the 180 days, it may be possible to “manufacture” a “White Knight” buyer that is dissimilar to the taxpayer doing the 1031 exchange. In this arrangement, you could have a “white knight” purchase the old relinquished property from you to get it off your books within the 180 day reverse exchange period. The white knight will then act as temporary owner of the relinquished property until such time that the property is later sold to a third-party purchaser.
To be treated as the owner for tax purposes, the White Knight will need to have sufficient incidents of ownership of the relinquished property, so it will be conveyed the property by deed or contract for deed. In PLR 200712103, the Internal Revenue Service ruled that a taxpayer doing a safe-harbor reverse exchange (under Rev. Proc. 2000-37) could sell its relinquished property to a "related party" (but dissimilar taxpayer) and that this related party could also subsequently market and sell the relinquished property without having to hold the property for two (2) years.
A Note on Private Letter Rulings
Private letter rulings are a written statements issued to specific taxpayers that interprets and applies tax laws to those taxpayer’s represented sets of facts. A PLR is issued in response to written requests submitted by taxpayers. A PLR may not be relied on as precedent by other taxpayers or by IRS personnel, but may give insights into how other taxpayers are dealing with similar situations.
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