Long-Awaited Taxpayer Victory Impacts Construction & Reverse 1031 Exchanges

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The Tax Court finally issued an opinion in the Estate of Bartell case on August 10th, almost 10 years following the initial trial. The case dealt with a non-safe harbor reverse construction exchange where the accommodator did not put any equity into the project, the accommodation period lasted for 17 months, and the taxpayer guaranteed the construction loan.

Estate of Bartell

The IRS argued that the appropriate test for a non-safe harbor reverse exchange was whether the accommodator had the substantial benefits and burdens of ownership. The court, however, ruled in favor of the taxpayer on the basis that the accommodator had not acted as the taxpayer's agent.

This decision currently appears to be a major victory for taxpayers who want to accomplish construction exchanges lasting more than 180 days as well as reverse exchanges that might exceed 180 days. However, the IRS has 90 days to appeal this decision and it is likely to do so. 

Tips for Taxpayers

Affirmation on appeal is not certain. Anyone seeking to rely on this opinion must be careful to avoid both language of agency in the exchange documents as well as features that might suggest an agency relationship.

Note that this exchange occurred in the Ninth Circuit. The Tax Court relied heavily on the fact that Ninth Circuit cases have allowed wide latitude in structuring exchanges.

  • 1031 Hotline: If you have questions about what types of property qualifies for 1031 treatment, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

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