IRS Disagrees with Tax Court's Bartell Estate Ruling

On August 14, 2017, the IRS released an Action on Decision (AOD) stating that it did not agree with the decision from the Tax Court regarding the Estate of Bartell. In 2016 the Tax Court held that a reverse like-kind exchange implemented outside of certain safe harbor provisions of Rev. Proc. 2000-37 qualified for nonrecognition treatment under Section 1031. Rev. Proc. 2000-37 states that someone making an exchange could 'hold' a replacement property for up to 180 days with an exchange accommodation titleholder (EAT) prior to a transaction in a qualified exchange arrangement. In which case the IRS would treat the EAT as the beneficial owner of the property for federal income tax purposes, if certain requirements are met. 

However, the Tax Court permitted a holding arrangement in which the replacement property was held for 17 months without the accommodator having traditional benefits and burdens of ownership. The reason the IRS disagrees with this ruling is due to Section 1031 reverse exchanges indicates the hold time for EAT property is 180 days, and 17 months exceeds the prescribed time; therefore, the EAT would have to acquire ownership of the property, and not just bare legal title (which would make it a Section 1031 reverse exchange). 

The IRS AOD means that it will continue to litigate holding arrangments for Rev. Proc. 2000-37 safe harbor limits where the accommodator does not have traditional benefits and burdens of ownership. 

*information provided by PricewaterhouseCoopers LLP

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The Birth of the 1031 Exchange

The U.S. government needed a quick revenue channel when we entered into World War 1 and because of this the IRS sanctioned Section 1031, but it did not include a tax-deferment option. This option did not become available until Congress enacted the Revenue Act of 1921 which allowed for like-kind and non-like-kind exchanges to be performed. It was designed to provide relief to taxpayers by providing a deferment with hopes that they would continue reinvesting their money. However, Congress quickly amended the act with Revenue Act of 1924 which made only like-kind exchanges eligible for tax deferral.  

Of course the 1031 Exchange has changed dramatically since it's birth. Revenue Procedure 2000-37 provided investors with Qualified Intermediaries to guide investors with the best exchange options for them. Tennessee 1031 Exchange is the best Qualified Intermediary to help you with all of your exchanges. If you have questions, or want to start an exchange, click the button below. 

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Like-Kind Exchanges for Section 1031

There are rules and regulations for everything, and Like-Kind exchanges are no different. Section 1031(a) of the IRS states rules for realized gains, and losses, that occur from exchanging like-king property. Primarily that none of the gain, or loss, will be recognized at the time the exchange occurs. It also states that property being exchanged has to be identified within 45 days, and received within 180 days. Other 1031 sections include the following: 

• 1031(b): lists when like-kind property and boot can be received. The gain is recognized to the extent of boot received
• 1031(c): covers cases similar to 1031(b), but refers to losses instead of gains
• 1031(d): explains the requirements for calculations during a like-kind exchange
• 1031(e): expands on the fact that livestock of different sexes are not of like-kind
• 1031(h)(1): stipulates that real property outside of the U.S. and real property inside the U.S. are not of like-kind

The 1031 Exchange can be helpful for investors, but has many rules that has to be followed. A Qualified Intermediary, such as Tennessee 1031 Exchange, will be extremely useful in navigating these requirements. To start your exchange, click on the button below!

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