WHAT IS AN ExchangeACCOMMODATION TITLEHOLDER

The term “ExchangeAccommodation Titleholder” is new to the Exchangearena. Before we focus on this new way of doing business with the use and need of the Exchangeaccommodation titleholder, lets talk about its purpose. A taxpayer (seller) of business or investment held property may want to structure their disposition as an Exchangeunder Section “1031” of the Internal Revenue Code. The primary benefit here is for the taxpayer to Pay No Capital Gains Tax. But, the 1991 Deferred ExchangeRegulations specifically state that, they don’t pertain to “Reverse Exchanges,” and that the relinquished property must be disposed of before the replacement property is acquired.

The problem here is that a taxpayer may need to acquire a replacement property before the disposition of the relinquished property for many reasons. For example, a contingency in the contract of sale of the relinquished property, may not have been removed prior to the date of the closing of the replacement property. Or perhaps the taxpayer has not even found a buyer for the relinquished property yet, or the relinquished property isn’t even on the market for sale yet. The taxpayer may lose an earnest money deposit or a favorable financing rate if they fail to close on the replacement property on the specified closing date.

Revenue Procedure 2000-37 To The Rescue

The Revenue Procedure provides a safe harbor for a “parking style Exchange”, and allows an “ExchangeAccommodation Titleholder” to acquire either, the relinquished property, or the replacement property in an Exchange, and hold it for up to 180 days while the taxpayer attempts to sell the relinquished property. The Revenue Procedure is applicable to properties acquired by an ExchangeAccommodation Titleholder on, or after, September 15, 2000. If the requirements of the Revenue Procedure are not satisfied (for example the property is not transferred within the 180 day period), then the Revenue Procedure does not apply.

The Revenue Procedure provides two forms of qualified Exchangeaccommodation arrangements. Keep in mind, no matter which of the two forms are used, the taxpayer can never have legal title to both the relinquished and replacement properties at the same time. In the first format structure, the Exchangeoccurs with the taxpayer acquiring the replacement property before disposing of the relinquished property. In order to accomplish this, the taxpayer must convey legal title of the relinquished property to the Exchangeaccommodation titleholder and can then go directly into legal title of the replacement property. This is called a “parking Exchange”. The taxpayer has 180 days to have a real buyer acquire legal title of the relinquished property from the Exchangeaccommodation titleholder. This format is typically used when the lender requires that the taxpayer, rather than the Exchangeaccommodation titleholder, acquire legal title to the replacement property.

In the second format structure, (what’s referred to as a “reverse Exchange”), the Exchangeaccommodation titleholder acquires the replacement property and holds it until the taxpayer comes out of legal title of the relinquished property to the real buyer. Again, this must occur within 180 days. This format structure works well when the taxpayer is not certain what relinquished property will be Exchanged, or if a due on sale clause on the relinquished property would be triggered by the transfer of the relinquished property in the first format structure. It is also the only format structure that allows for improvements to be added by the Exchangeaccommodation titleholder on the replacement property, what’s referred to as either a build-to-suit Exchangeor improvement Exchange.

ExchangeAccommodation Titleholder Requirements

The Exchangeaccommodation titleholder cannot be the taxpayer or a disqualified person as defined in the 1991 Deferred ExchangeRegulations. The Exchangeaccommodation titleholder must be a person subject to federal income tax by having what’s called, “Qualified indicia of ownership” at all times, from the date of acquisition by the Exchangeaccommodation titleholder, until the parked property is transferred to the taxpayer. If the parked property is the replacement property, or to the buyer, if the parked property is relinquished property. “Qualified indicia of ownership” means legal title to the parked property, such as real property. The Revenue Procedure does not state whether the deed must be recorded in the case of real property. An unrecorded deed should be allowable if it transfers title under applicable state law.

In addition, the Revenue Procedure does not preclude the Qualified ExchangeAccommodation Titleholder Agreement from specifically stating that the Exchangeaccommodation titleholder is the taxpayer’s agent. This declaration may be helpful when a parked replacement property is undergoing construction. The Revenue Procedure specifically does not address whether the Exchangeaccommodation titleholder must depreciate the parked property while holding it. The Revenue Procedure gives the taxpayer five (5) business days to enter into a Qualified ExchangeAgreement after the Exchangeaccommodation titleholder has acquired the parked property. “Business day” is used in the Internal Revenue Code and Regulations to mean, “a day which is not Saturday, Sunday, or legal holiday.”

In the event of a build-to-suit or improvement Exchangein which the Exchangeaccommodation titleholder needs to go into title of the replacement property to add the improvements, the Revenue Procedure allows the taxpayer to guarantee a construction loan to the Exchangeaccommodation titleholder. The Exchangeaccommodation titleholder may enter into a construction contract and appoint the taxpayer as agent to handle all supervision and draws. A construction management agreement might be the most efficient way to pass those responsibilities to the taxpayer, and the revenue procedure allows such an arrangement.

Single Purpose Entity As ExchangeAccommodation Titleholder

A taxpayer engaging in a safe harbor Exchangeshould insist that the Exchangeaccommodation titleholder be a sole purpose entity, holding only the taxpayer’s property.  The liability risk of combining different taxpayers properties are simply too great and also, a third party lender arranging financing may require that the Exchangeaccommodation titleholder be a sole purpose entity.

Wake-Up Item

The Exchangeaccommodation titleholder is a different service then the “Qualified Intermediary” service in a deferred Exchangetransaction. In a parking Exchange, or reverse Exchange, there is a need for the services of a qualified intermediary, and the services of the Exchangeaccommodation titleholder. In addition there are separate Exchangedocuments for these two different services that need to be provided in order to be a success in the eyes of the Internal Revenue Service.

As with any type of an Exchangealways consult with a professional, qualified intermediary before implementing the proposed Exchangetransaction.