New Tax Case and Reverse Exchanges

On August 10, 2016, the Tax Court issued its long-awaited decision in Estate of George H. Bartell, Jr. v. Commissioner, 147 T.C. No.5 (2016) holding that a non-safe harbor reverse exchange qualified for tax deferral treatment under IRC section 1031. In this case, the taxpayer parked replacement property with an accommodator for 17 months. During that time, the accommodator constructed improvements on the property and acted as the borrower on a construction loan guaranteed by the taxpayer. The facts in this case took place prior to the effective date of Rev. Proc. 2000-37 which provides a safe harbor for reverse exchanges if certain procedural steps are followed. Even though the provisions of the revenue procedure did not apply, the structure of the transaction was virtually identical to a safe harbor reverse exchange other than the 17-month time frame. 

Generally, for reverse exchanges that fall outside of the safe harbor provisions of Rev Proc 2000-37, the party holding title to the replacement property was thought to need the benefits and burdens of ownership of that property. However, the Tax Court in the Bartell decision stated that where a third party accommodator acquires the replacement property, it is not necessary for the accommodator to have the traditional benefits and burdens of ownership.

This court decision could be good news for investors who need longer than the 180 days provided under the Revenue Procedure safe harbor to complete their reverse or improvement exchange. However, the impacts of this decision are not yet entirely clear and the IRS has 90 days to appeal the decision.

Click here for more information on safe harbor reverse exchanges under Rev. Proc. 2000-37.