Last year on the blog, we reported a Tax Court decision approving “reverse” 1031 Exchanges in which a taxpayer acquires replacement property more than 180 days before disposing of relinquished property.
The IRS recently announced it will not follow the Tax Court decision, and may seek future challenges in other courts to overturn it. This limits the Tax Court decision’s impact until the courts establish more precedent.
The IRS announcement should not, however, deter all taxpayers needing more than 180 days to dispose of relinquished property from attempting 1031 Exchanges. In any reverse 1031 Exchange transaction, a person unrelated to the taxpayer must hold the replacement property or relinquished property until the ultimate buyer acquires the relinquished property. The Tax Court decision and IRS announcement only affect transactions in which an agent or straw man holds the replacement or relinquished property for the taxpayer in the interim period, without bearing risks normally associated with property ownership. Sometimes a taxpayer can find an unrelated person willing to bear some of the benefits and burdens of ownership for the property, differentiating the arrangement from an agent or straw-man structure. This opens the door to a taxpayer taking the position a longer holding period may exist, even if financing or other arrangements remain in place between the interim titleholder and the taxpayer.
The IRS announcement can be read at irs.gov.