Study Notes on Exchanges

Taxpayer obtaining an option on Seller’s property;

Taxpayer leasing Seller’s property and subsequently exchanging; or

An exchange between Taxpayer and Seller with a leaseback of Taxpayer’s property by Taxpayer.

(1) Title must be held by an exchange accommodation titleholder who is not the taxpayer and is subject to federal income tax, at all times from the date of acquisition until the property is transferred;

(2) At the time title is transferred to the exchange accommodation titleholder, it must be the taxpayer’s bona fide intent that the property is either replacement or relinquished property in an exchange that qualifies for nonrecognition;

(3) No later than five business days after the transfer of title, the taxpayer and the exchange accommodation titleholder enter into a written agreement that the property is being held to facilitate an exchange under §1031;

(4) No later than 45 days after the title is transferred, the relinquished property is properly identified;

(5) No later than 180 days after the transfer of title to the exchange accommodation titleholder, the property is transferred as either replacement or relinquished property; and

(6) The combined time period that the relinquished property and the replacement property are held in QEAA does not exceed 180 days.

The IRS has ruled that the reverse exchange procedure does not apply to replacement property that was owned by the taxpayer within 180 days prior to the transfer to the exchange accommodation titleholder (EAT).

The ruling was designed to stop some taxpayers who have interpreted R.P. 2000-37 as permitting an exchange in which the taxpayer transfers property to an exchange accommodation titleholder and receives that same property as replacement property in an exchange for other property of the taxpayer. R.P. 2004-51 is applicable to transfers on or after July 20, 2004.

Pot method.

Since only one escrow is employed it is administratively easier to handle;

Because there are fewer title transfers the parties can reduce additional taxes or fees imposed upon such transfers;

Warranties and representations are made directly between the parties;

A pot escrow is easier to understand and avoids any party taking “strange” title.

A pot exchange requires that all parties execute a single agreement. As a result, all parties to the exchange must sign any amendment.

An IRS audit of one party may result in an audit of all parties.

The pot agreement may create damaging privity of contract under R.R. 77-297.

An escrow is a deposit of money and instruments by two or more persons with a third person (escrow holder), which are held by him or her until certain conditions are met.

Attorney closings.

An escrow agent with the parties to an escrow is fiduciary in nature. The agent is required to act in the highest faith toward all principals since the escrow holder is an agent to all principals.

Someone who is an employee has the role of agent and exercises the agency.

These are not included in the amount realized from the disposition of property are disregarded.