6.5 Qualified Exchange Accommodation Arrangements (QEAAs) for Reverse Exchanges

The like-kind exchange rules (6.1) generally do not apply to a so-called reverse exchange in which you acquire replacement property before you transfer relinquished property. However, if you use a qualified exchange accommodation arrangement (QEAA), the transfer may qualify as a like-kind exchange.

Under a QEAA, either the replacement property or the relinquished property is transferred to an exchange accommodation titleholder (EAT) who is treated as the beneficial owner of the property for federal income tax purposes. If the property is held in a QEAA, the IRS will accept the qualification of property as either replacement property or relinquished property, and the treatment of an EAT as the beneficial owner of the property for federal income tax purposes.

The QEAA rules allow taxpayers to structure “parking transactions” in which the replacement property is acquired by the EAT before the transfer of the relinquished property. However, the QEAA safe harbor does not apply if the taxpayer transfers property to an EAT and receives that same property back as replacement property for other property of the taxpayer.

Caution

Parking Transactions

Property transferred to you by the exchange accommodation titleholder (EAT) cannot be treated as property received in an exchange if you previously owned it within 180 days of its transfer to the EAT.

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The IRS has set numerous technical requirements for QEAAs. Property is held in a QEAA only if you have a written agreement with the EAT, the time limits for identifying and transferring the property are met, and the qualified indicia of ownership of property are transferred to the EAT.

The EAT must meet all the following requirements: (1) Hold qualified indicia of ownership (see below) at all times from the date of acquisition of the property until the property is transferred within the 180-day period (see below); (2) be someone other than you, your agent, or a person related to you or your agent; (3) be subject to federal income tax. If the EAT is treated as a partnership or S corporation, more than 90% of its interests or stock must be owned by partners or shareholders who are subject to federal income tax.

The IRS defines qualified indicia of ownership as either legal title to the property, other indicia of ownership of the property that are treated as beneficial ownership of the property under principles of commercial law (for example, a contract for deed), or interests in an entity that is disregarded as an entity separate from its owner for federal income tax purposes (for example, a single member limited liability company) and that holds either legal title to the property or other indicia of ownership.

There are time limits for identifying and transferring property under a QEAA. No later than 45 days after the transfer of qualified indicia of ownership of the replacement property to the EAT, you must identify the relinquished property in a manner consistent with the principles for deferred exchanges (6.4). If qualified indicia of ownership in replacement property have been transferred to the EAT, then no later than 180 days after that transfer, the replacement property must be transferred to you either directly or indirectly through a qualified intermediary (6.4). If the EAT receives qualified indicia of ownership in the relinquished property, then no later than 180 days after that transfer, the relinquished property must be transferred to a person other than you, your agent at the time of the transaction, or a person who is related to you or your agent.

Note: For further details on the IRS’s guidelines for QEAAs, see IRS Publication 544 and Revenue Procedure 2000-37, as modified by Revenue Procedure 2004-51 (parking transactions).