May 2006 Newsletter ...

IRS RULES –
TAXPAYERS MAY NOW ACQUIRE REPLACEMENT PROPERTY
FROM RELATED PARTIES!

 The IRS informed us with Private Letter Ruling (PLR) 20040002 that a taxpayer could acquire replacement property from a related party if the related party is also doing an exchange.  PLR 200616005 reaffirms this position.  The Service ruled that taxpayer could sell relinquished property A to unrelated buyer through a Qualified Intermediary (QI), and acquire replacement property B from related party S corporation without violating the related party rules of § 1031(f)(4) IF the related party was also doing an exchange out of property B into other property. 

The related party was thus not cashing out.

The taxpayer and related party represented that they both would hold their replacement property for at least two years.   This is similar to a previous PLR 200440002, which reached the same result.  In this new ruling, however, the taxpayer represented that it was trying to obtain additional replacement property from an unrelated seller, and the taxpayer would pay tax on the cash received if the taxpayer was unable to find additional replacement property.   The Service ruled that this taxable boot would not blow the whole related party exchange.

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Jeffrey P. Helsdon
Certified Exchange Specialist®