After deliberating for a decade, in the case G.H. Bartell, Jr. Est., U.S. Tax Court (August 11, 2016), the Tax Court has held that an intermediary with no benefits or burdens of ownership can hold title to real property outside of the established IRS “reverse” 1031 Exchange safe harbor without disqualifying the taxpayer’s 1031 Exchange.
In the case, the intermediary held the potential 1031 Exchange replacement property for over one year (longer than the 180-day period allowed by the IRS safe harbor) before transferring it to the taxpayer, following the taxpayer’s sale of its intended relinquished property. During this period, the taxpayer funded all costs (including acquisition and construction costs) associated with the property, and entered into arrangements that constructively prevented the titleholder from realizing the benefits of owning the property.
The “owner” of property from the IRS standpoint is usually the party with the “benefits and burdens” of ownership, not legal title. Under this standard, the 1031 Exchange would be disqualified because the taxpayer would be treated as owning the replacement property long before relinquishing their current property. However, the Tax Court found that different rules apply in the 1031 Exchange context. In this arrangement the intermediary “need not assume” the benefits and burdens of ownership of the replacement property in order to be treated as its owner for Section 1031 purposes before the exchange.
Essentially the Tax Court held that a taxpayer could contract with an intermediary to acquire land and construct a facility more than a year prior to using that property as the replacement property in a like kind exchange. Whereas previously most practitioners would advise a client that a “construction” type exchange needed to be completed within the 180 day period, this recent ruling may be increasing the applicability of Section 1031 to construction exchanges.
It’s important to note that the Tax Court ruling relied heavily on a decision of the U.S. Court of Appeals for the Ninth Circuit. Nevertheless, this case is significant, substantially increasing the flexibility taxpayers have in structuring 1031 Exchanges.
Contact Us If you have questions regarding this case, and the rules surrounding this concept, please contact Laura by calling 513-241-8313, or have a member of the Barnes Dennig tax team answer your question here.