Mills on Planning for Like Kind Exchanges - PLRs 200810016 & 200810017

Mills on Planning for Like Kind Exchanges - PLRs 200810016 & 200810017


In this Analysis, Patricia Hughes Mills explains how PLR 200810016 (I.R.S. 2007) and PLR 200810017 (I.R.S. 2007) enhance planning opportunities for like kind exchanges by confirming the parameters of a technique that allows a taxpayer who wants to dispose of a property to purchase replacement property from a related party, which may be helpful in situations where the taxpayer has trouble finding acceptable replacement property within the time frames required by IRC Sec. 1031. She writes:
 
     Related party exchanges are generally governed by I.R.C. § 1031(f), which provides that if a taxpayer engages in an exchange which otherwise qualifies under § 1031 with a related party, gain will have to be recognized if either the taxpayer or the related party disposes of the property received in the exchange within two years of the exchange. The concern in many of these transactions is I.R.C. § 1031(f)(4), which states that I.R.C. § 1031 will not apply to any transaction or series of transactions structured to avoid the purpose of § 1031(f). . . .
 
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     . . . . In our view, the purpose of section 1031(f)(4) is to stop taxpayers from violating the two-year rule, and not to preclude taxpayers from planning to dispose of property after the two-year period. Thus, if a taxpayer exchanges property with a related party, intending to dispose of the replacement property after the two-year period, section 1031(f)(4) would not require recognition of the original gain. This analysis would not apply, however, if the exchange were a sham.
 
     A similar technique was recently used in identical private letter rulings: PLR 200810016 and PLR 200810017. In those rulings, the AB LLC (“AB”), which owned Blackacre, and the CD LLC (“CD”), which owned Greenacre, were related parties. AB agreed to sell Blackacre to an unrelated buyer (“Buyer”), and wanted to do so as part of a § 1031 exchange by acquiring Greenacre as its replacement property. CD will acquire qualified replacement property so that its transfer of Greenacre will also qualify under § 1031. To facilitate their exchanges, AB and CD enter into exchange agreements with a qualified intermediary (“QI”). Pursuant to the exchange, AB will transfer Blackacre to QI, QI will sell Blackacre to Buyer, acquire Greenacre from CD, and transfer Greenacre to AB to complete AB's exchange. Similarly, QI will receive Greenacre as part of CD's like kind exchange, will acquire New Property from an unrelated Seller and transfer it to CD to complete CD's exchange. After all of the transactions are completed, Buyer will own Blackacre, AB will own Greenacre, and CD will own New Property. AB and CD agree not to dispose of their respective properties within two years of the exchange.
 
(footnotes and citations omitted)