There are two ways to conduct a reverse 1031 exchange. Under the safe harbor in Rev. Proc. 2037, you’re capped at parking the property at 180 days. This is a very friendly safe harbor, under which you can manage construction, arrange for financing, advance the funds to the qualified intermediary, and more. The downside is it’s capped at 180 days.
What if you want to do a reverse construction exchange and you want to build the Taj Mahal of improvements. Can you get that done in 180 days? Probably not. In this scenario, you may want to enter into a parking arrangement that goes beyond 180 days – outside of the safe harbor.
There’s a notorious case called Estate of Bartell in which the parking arrangement was something like 17 months. A drug store operator was going to move their operation from an interior strip mall location to an external pad site location. They wanted to build brand new improvements to their exact specifications. The intermediary holding title really had no risk. The IRS attacked this non-safe harbor transaction because they said the intermediary’s entity didn’t have any risk – it was merely a facilitator. The tax court essentially said: “so what?”
Non-safe harbor exchanges do not have the same certainty of tax treatment as safe harbor exchanges. You need to think long and hard about whether or not you want to step outside of that safe harbor.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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