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.
