| Assume that you want to make a tax-free exchange of your apartment building (the “relinquished property”) for a retail strip center (the “replacement property”). You located a great deal on a retail center, but only if you close in 30 days. However, your buyer for the apartment cannot get its financing for 90 days. By using a “parking transaction” (sometimes referred to as a “reverse like-kind exchange”) you may be able to qualify the purchase and sale as a nontaxable exchange. Parking transactions are designed to “park” the desired new property (aka replacement property) with someone until you can transfer your existing property (aka the relinquished property) and exchange it for the replacement property. Under the safe harbor the IRS created for such exchanges, the “someone” that you park the property with is called the Exchange Accommodation Titleholder (“EAT”). In the example above, you would arrange with an EAT to acquire the retail center for you and hold it until you can close on the sale of your apartment building. At the time of sale, you would transfer your apartment building to the EAT, who would sell it to the ultimate buyer, use the sale proceeds to pay down or payoff the loan on the retail center and simultaneously transfer it to you. Alternatively, the EAT could acquire the retail center, immediately exchange it with you for the apartment building, and then hold the apartment building until you are able to close on the sale of it to the ultimate buyer. Under the IRS safe harbor, you must identify the relinquished property within 45 days after the EAT acquires the replacement property and the EAT must, within 180 days, either (a) transfer the relinquished property to a third party, or (b) transfer the replacement property to you, the exchanger, as applicable. You can also enter into certain agreements with the EAT that may be necessary to facilitate the exchange such as (i) a loan to the EAT or a loan guarantee; (ii) an agreement to pay the expenses of the EAT; (iii) a lease; or (iv) a property management agreement. Bottom Line: By using a parking transaction, you can acquire replacement property even before you sell your existing property and still qualify as nontaxable like-kind exchange. “If your biggest tax deduction was bail money, you might be a redneck.” Jeff Foxworthy |
Did you know that you can buy replacement property before selling your existing property and still qualify for a nontaxable like-kind exchange?
