Prior to the Rev Proc 2037 that gave us a safe harbor for doing reverse exchanges, many intermediaries were facilitating reverse exchanges but they had no safe-harbor or parameters to know how long or how to structure a reverse exchange. They only had old case law and old tax precedents to rely on. So they were sometimes called common law reverse exchanges.
The beauty of that timeframe was that we weren't limited to 180 day parking arrangements. After Rev Proc 2037, the common form of doing a reverse exchange was to do them in the reverse safe harbor, which capped us at 180 days. But in Rev Proc 2037, it specifically says that they don't make any inference as to non-safe harbor reverses that were done prior to the rev proc, or even after.
So the door was left open that non safe harbor reverse exchanges that park a property for longer than 180 days are still a valid and proper way to do a reverse exchange. Though they are a little bit more complicated and they don't have the definiteness of a safe harbor, they’re still potentially valid.
Estate of Bartell
In a case called Estate of Bartell, the tax court finally rendered a decision after thinking about it for 10 years. This was a reverse exchange in which the holding period went beyond 180 days and there was an argument that the entity that was parking the replacement property which did not really have a whole lot of economic upside or downside - the argument the IRS had was that the title holder was just an agent of the taxpayer (a Patsy). They don't really have any risk of loss, they're just kind of accommodating this for the benefit of the taxpayer.
But the tax court said no, there's a written agreement here that says that the accommodator that's holding the property is doing so to facilitate a 1031 exchange. Even though they don't have a lot of skin in the game and they don't have a lot of economic upside they are doing it for the facilitation of the exchange and therefore we're going to respect the taxpayer’s arrangement and not collapse this down and invalidate the exchange.
Well the pendency of this case, which took 10 years to come out, created a lot of rancor and uncertainty as to whether non-safe harbor exchanges were legit.
The issuance of the decision gives us a breath of fresh air that these non-safe harbor exchanges can be OK. The IRS is may be appealing the decision and so we don’t have a final and complete disposition yet. Stand by for more news on the Estate of Bartell.
Rev. Proc. 2000-37
No inference. No inference is intended with respect to the federal income tax treatment of arrangements similar to those described in this revenue procedure that were entered into prior to the effective date of this revenue procedure. Further, the Service recognizes that "parking" transactions can be accomplished outside of the safe harbor provided in this revenue procedure.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
© 2021 Copyright Jeffrey R. Peterson All Rights Reserved
