October Tax Free Exchange Newsletter

We hope you find the following tax free exchange newsletter helpful in your planning engagements
 If you need additional consultation call 1-800-839-1031 or visit our web site at http://www.texas1031.com

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 Thank you,
 Texas 1031 Exchange Company


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The Texas 1031 Exchange Company
175 Seguin St.
New Braunfels, Texas 78130
800-839-1031 830-625-1031 Fax 

Newsletter


      New Authority for the Reverse Exchange 
     




The most common form of a tax-deferred exchange involves the sale of property by the intermediary followed by the purchase of the replacement property within 180 days. This pattern however is usually not practical for a business planning to move to a newly constructed facility or someone faced with a tight deadline on the purchase of new property. In either of these circumstances, a reverse exchange is probably indicated. 

Current Legal Authority 

On September 15, 2000 Rev Proc. 2000-37 was issued which specifically provides for reverse exchanges.

Current Alternatives for the transaction 

  1.. If you wish to use a forward exchange, you may delay closing the purchase of the replacement property through the use of an option or large deposit of earnest money until the sale of the relinquished property. If the option is coupled with a lease, the combined terms of both documents should not transfer all benefits and burdens of ownership (equitable title). 
  2.. You may also use the exchange-first pattern of a reverse exchange where the Qualified Intermediary (QI) takes title and holds the relinquished property until it sells as provided for in the exchange documents. At the closing, the client (exchanger) takes title to the replacement property at the same time the QI takes title to the relinquished property in a simultaneous exchange. In order to secure the exchanger, the QI signs a note and deed of trust on the relinquished property. The note has a face value equal the cost of the replacement property and is satisfied by the sales proceeds of the relinquished property. 

  3.. Use the exchange-last pattern of a reverse exchange, where the QI takes title and holds the replacement property until the relinquished property sells. When the relinquished property sells, the QI transfers title for replacement property to the exchanger in a simultaneous exchange, as provided for in the exchange documents.
Under Rev Proc 2000-37, the relinquished property is required to be identified within 45 days of the transfer of the replacement property. This is similar to a forward exchange except that the relinquished property is identified. The relinquished property also needs to be transferred to the ultimate purchase within 180 days of the receipt of the replacement property.

Special Purpose Entities (SPE) 

The most common SPE is a single member (owner) limited liability company (SMLLC). The SMLLC is considered a tax "nothing" under Treas. Reg. 301.7701-3(b)(ii)-default rule. If the SMLLC takes title to the "parked" replacement property, the exchanger may choose to forgo the purchase of a second title policy when it acquires the SMLLC as it's replacement property. The approach also anticipates potential lender requirement for a Bankruptcy Remote Single Asset Entity (BRSAE). Finally the SMLLC may afford some degree of liability protection to the owner of the LLC from claims associated with the property. In a community property state, such as Texas, it is questionable whether a married couple can have a SMLLC is possible; as there may be considered to have two owners. Also in certain states a SPE may save on transfer tax.

Financing the Purchase of the Replacement Property 

In order to minimize the possibility that the QI would be considered the exchanger's agent, most advisors prefer bank loans over direct loans from the exchanger. The bank loans are nonrecourse to the QI but guaranteed by the exchanger. In the exchange last-method, the debt is secured by the replacement property and is paid off with the relinquished property sale proceeds. To the extent of deficiency in proceeds, the exchanger takes replacement property subject to debt, assumes the debt or provides it's own funds to retire the debt. To the extent of proceeds exceeding debt, further replacement properties may be purchased or the exchanger receives boot. 

Management of the "Parked " Property. 

In a triple net lease the exchanger/tenant takes responsibility for the property under terms of the lease. All tenants become subtenants and risk of rent or other tenant defaults shifts to the exchanger. The rent, payable by the exchangor, is set at an amount that considers the monthly interest-only payment to the bank. 


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