This ruling is important because Code Section 1031 will not let a taxpayer buy the new (or replacement) property, until after he has sold his old (or relinquished) property. Nonetheless, some taxpayers have fallen into situations beyond their control where they need to take title to the new property before the sale of the old property closes. For example, the taxpayer is scheduled to close the sale of his old property on Wednesday and the purchase of his new property on Friday. Then he suddenly learns that the buyer of his old property must delay the purchase for a couple of weeks. The seller of the new property demands that the taxpayer close on Friday, as the two parties agreed, or the seller will sell the property to someone else and keep the earnest money.

In this situation, the taxpayer’s best alternative is to do a “reverse exchange” where their qualified intermediary takes title to the new property and holds, or “parks” it until the old property closes, at which time the intermediary transfers the new property to the taxpayer to complete the exchange. These parking arrangements are the subject of this new ruling.

The biggest difference required by the ruling is the new limit of 180 days for the life of the reverse exchange. Prior to the ruling, it was assumed that the 180-day life of the transaction started at the time of the sale of the old property, regardless of how long the qualified intermediary had held the new property. The ruling now requires that the entire reverse exchange be completed within 180 days of the date the qualified intermediary purchased the new property for the taxpayer.

The other provisions you must meet to fall within the safe harbor are:

1. The party holding the parked property most generally will be the qualified intermediary, or an S Corporation or partnership under the intermediary’s control.

2. There must be proof of intent for the parked property to be part of the exchange.

3. The taxpayer and the qualified intermediary must enter into a “Qualified Exchange Accommodation Agreement” that states that the taxpayer intends to meet the requirements of Section 1031 and Revenue Procedure 2000-37. In addition, the qualified intermediary must file a tax return reporting its ownership and sale of the property.

4. Within 45 days of the purchase of the parked property, the taxpayer must complete a 45-day identification form identifying the old property to be sold.

The ruling also clarifies that the reverse exchange will not be disqualified if the taxpayer advances the funds or guarantees the debt used to acquire the property. The taxpayer also may manage the property and supervise construction and improvements on the property.

The taxpayer and the parking entity may enter into agreements specifying the price at which the property will be transferred to the taxpayer, provided that such agreements are effective for a period of time not exceeding 180 days from the date of acquisition by the parking entity.