Academic journal article Journal of Accountancy

IRS Expands Replacement Property in 1031 Exchanges

Academic journal article Journal of Accountancy

IRS Expands Replacement Property in 1031 Exchanges

Article excerpt

The IRS released revenue procedure 2002-22 in March to address the use of fractional ownership interests as replacement property in IRC section 1031 exchanges. Commonly referred to as "tenancy-in-common" or TIC interests, these fractional interests offer significant advantages to taxpayers completing 1031 exchanges.

Under section 1031, a taxpayer may defer gain recognition by exchanging for like-kind property. The replacement property cost must equal or exceed the net sales price of the relinquished property and the taxpayer must replace all debt and equity. To successfully complete the exchange, the taxpayer must meet certain requirements. Specifically, he or she must identify potential replacement property within 45 days of selling the relinquished property.

Finding an attractive replacement property in the right price range in such a short time can be difficult, and a taxpayer must take title to the property he or she ultimately buys in the same manner as the relinquished property. (For example, a taxpayer tired of the hassles of owning and managing a rental house cannot exchange it for a partnership interest in a professionally managed shopping center.) This title requirement often precludes taxpayers from buying a share in a larger, potentially more attractive property.

In response to the need for "ready-to-buy" investment products that taxpayers could purchase with varying amounts of cash and debt, a small group of companies began offering TIC interests as replacement property. To address the title issue, they used a co-ownership structure. Despite this arrangement, many CPAs were still concerned the IRS might see the TIC interests as essentially partnership interests, jeopardizing the benefits of an exchange.

After declining to answer several letter ruling requests on this matter, the IRS decided not to issue any more rulings pending further review. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.