SAFE HARBOR FOR TAXPAYERS IN
REVERSE AND BUILD-TO-SUIT
TAX-FREE EXCHANGES

On September 15, 2000, the Internal Revenue Service issued Revenue Procedure 2000-37 to provide a safe harbor for taxpayers engaged in “parking” transactions to facilitate “reverse” and “build to suit” like-kind exchanges. The revenue procedure requires the following:

• The exchange accommodation titleholder party (“EAT”) must hold legal title to either the replacement property or the relinquished property and other indicia of ownership that are recognized under commercial law (e.g. a contract for deed).
• EAT must be taxable. If the exchange accommodation titleholder is a partnership or S corporation, 90 percent of its interest must be owned by taxable parties.
• At the time the ownership of the property is transferred to EAT, the taxpayer must have a bona fide intent that the property held by EAT represents either the replacement property or relinquished property as part of a like kind exchange intended to qualify for non-recognition treatment under IRC Section 1031.
• No later than 45 days after the transfer of ownership of the replacement property to EAT, the relinquished property is to be properly identified by taxpayer. The taxpayer may identify alternative and multiple properties.
• No later than 180 days after the transfer of ownership of the property to EAT, the property must be transferred to the taxpayer or to the ultimate recipient in the IRC exchange.
• No later than 5 business days after the property is transferred to EAT, the taxpayer and EAT must enter into a written qualified exchange accommodation agreement (“QEAA”)
  

Requirements of QEAA

The Internal Revenue Service will not challenge the qualification of property as either “replacement property” or “relinquished property” (as defined in Section 1.1031(k)-1(a) of the Income Tax Regulations) for purposes of Section 1031 of the Internal Revenue Code and the regulations thereunder or (b) or the treatment of the “exchange accommodation titleholder” as the beneficial owner of such property for federal income tax purposes, if the property is held in a “qualified exchange accommodation agreement” (QEAA). The QEAA must contain the following:

• EAT is holding the property for the taxpayer to facilitate a section 1031 exchange;
• the parties agree to report the acquisition, holding, and disposition of the property in the manner required by Rev.Proc. 2000-37;
• EAT is the beneficial owner of the property for all federal income tax purposes;
• And the parties agree to report any tax attributes of the property in a manner consistent with the QEAA.

The revenue procedure allows the taxpayer to:

• Lease, manage, or improve the property while it is held by EAT;
• Loan or advance funds to EAT or guarantee a loan or advance to EAT.

Please Note: TAXPAYER IS ADVISED TO SEEK HIS/HER OWN LEGAL AND TAX
ADVICE PRIOR TO ENTERING INTO A “REVERSE OR BUILD-TO-SUIT” TRANSACTION.