Land Development Today - July/August 2007 - (Page 10)

TAX STRATEGY Reverse Your Steps Prior to Reversing Your 1031 Exchange By Julianna A. Clementi-Ryan A typical 1031 exchange allows a taxpayer to sell their investment/trade or use property either simultaneously with acquiring their replacement property or through a deferred process. A deferred process usually allows the taxpayer to accomplish the acquisition feat within 180 calendar days from the date that the taxpayer sold the relinquished property. The transaction necessitates the engagement of a qualified intermediary, who steps into the selling and acquisition shoes of the taxpayer, when the transaction does not involve a swap between two parties (i.e. the party to whom the taxpayer sells the relinquished property is the same party as the party from whom the taxpayer acquires the replacement property). The qualified intermediary (“QI”) does not need to step into the chain of title to orchestrate this type of exchange. Its main responsibility is to ensure that the taxpayer does not have constructive or actual receipt of the net proceeds from the sale of the relinquished property, which is why this transaction is easy to transact and “unobjectionably” priced. The average fee for this type of deal is under $1,000. There is another type of 1031 exchange and many taxpayers think that they have found the answer to their acquisition dilemma when they first hear about it. It is known as a reverse exchange. For those who have not heard about this type of exchange transaction, this article will explore when reversing is appropriate tool and how to avoid it when it is not. A Reverse Exchange It is often said that a reverse exchange is an exchange transaction that allows the taxpayer to acquire the intended replacement property prior to relinquishing the taxpayer’s old property. The term itself and this type of statement are misleading. Instead, a reverse exchange is better explained by stating that it is a transaction that involves two steps - a parking process and an exchange process. Coupled together these processes provide for an outcome that appears to be reverse in nature. Generally, acquisition of the intended replacement property, without the assistance of an exchange accommodation titleholder (“EAT”) invalidates the taxpayer’s ability to use the acquired property as the replacement property. An EAT’s purpose is to acquire either the taxpayer’s relinquished property or the taxpayer’s replacement property for the sole purpose of assisting the sequence of events from and exchange process perspective. If the EAT acquires the relinquished property, then the EAT becomes the pur- 10 July/August 2007 Sustainable Land Development Today

Table of Contents Feed for the Digital Edition of Land Development Today - July/August 2007

Cover Contents Our Voice: Industry Advocates Your Voice: Reader Response Cover Story: Preparing Your Tax Strategy The Rules of the Game Historical Redevelopment Project Profile: Seattle’s High Point Retention: From Ravine to Road Land Use: Picatinny Arsenal Mixed Use: Florida Offices Industry News Products/Services Showcase Classifieds Recommended Reading Advertiser Index Editorial Board The Last Word: What? Me Plan… Urban Development

Land Development Today - July/August 2007

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