A deferred like-kind exchange involving multiple parties is tax-free. If an actual exchange involves an unrelated third party, even if two parties elsewhere within the structure of the exchange transaction are related, the exchange is still tax-free.  That’s the green-light rule that the IRS just gave an investor in letter ruling advice.

While the IRS initially resisted exchanges where the replacement property is acquired before the relinquished property is transferred, the IRS has changed its mind and approves such transactions. Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized at that time. Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality.

Transfer of properties

The taxpayer (T) had appreciated rental property that it wanted to transfer in a like-kind exchange with a related party (RP). T entered into an agreement with an unrelated third-party to acquire replacement property that was like-kind and that was worth more than T's property. T successfully accomplished a tax-deferred like-kind exchange through several transactional steps.

The goal of the transaction is to avoid having one or more of the primary parties pay or receive cash for the property they are dealing with, so that there can be an exchange and not a sale.

T achieved a like-kind exchange. RP merely bought property and was not concerned about achieving an exchange. After the transaction, T held the replacement property and RP held T's old property. RP intended to dispose of its property within two years.

Parking

The rules allow taxpayers to use a qualified intermediary (QI) to facilitate a like-kind exchange. A taxpayer's transfer of relinquished property to a QI and subsequent receipt of like-kind replacement property from the QI is treated as an exchange with the QI. This is known as a parking transaction and is used to facilitate a reverse like-kind exchange.

If you need assistance with a like-kind exchange or would like additional information, please give us a call.

(LTR 200712013)