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  • Reverse and Property Improvement Exchanges Outside the Safe Harbor 

    Reverse and Property Improvement Exchanges Outside the Safe Harbor 

    Evolution 
    The idea that an exchange of a like kind property for another should not subject a Taxpayer, or Exchanger, to a tax payment so long as they did not “cash out” formed the basis for Section 1031 to become part of the Tax Code in 1921. At one time almost all asset types could be exchanged, but in the present era, only real estate can be exchanged. The rationale for this tax deferral was based on the fact that the Exchanger maintained a “continuity of investment” in the asset, and it would be unfair to assess a tax under the circumstances of maintaining the investment in the “like kind” property. Then, as well as now, applicable taxes were deferred until some final cash out disposition, if any. 
    There were additions to the Code section over time but there were still a lot of open questions as the use of §1031 gathered steam over the years. In 1991, the IRS sought to provide more certainty on what could or could not be done and promulgated some regulations to provide a safe harbor that people could follow when entering into a tax deferred exchange. The 1991 regulations included distinct safe harbors:  

    Security or Guaranty Arrangements 

    Qualified Escrow and Qualified Trust Accounts 

    Use of Qualified Intermediaries 

    Interest and Growth Factors 

    During a comment period before the 1991 rules came into effect, many people wrote in to the Internal Revenue Service (IRS) asking if the final rules could provide some guidance when circumstances dictated that the Replacement Property needed to be acquired before the sale of the Relinquished Property, commonly referred to as a Reverse Exchange, or when a portion of the Relinquished Property sale proceeds needed to be allocated to construction or improvement on the new property, a Construction or Improvement exchange. The IRS replied to these comments by declining to include such guidance but indicated that it would continue to study the issue and provide rules on it in the future. It took some time, but in the year 2000, that guidance was published in Revenue Procedure 2000-37.
    Safe Harbor for Reverse and Improvement Exchanges 
    Like the Forward Exchange Rules before it, IRS Rev. Proc. 2000-37 provided a new safe harbor for Reverse and Construction/Improvement Exchanges. Among other things, the rules required having a third party, referred to as an Exchange Accommodation Titleholder, park title to the subject property as part of the necessary structure. Also, it was a condition of the safe harbor that the transaction, including the title parking arrangement, could go on no longer than 180 days. 
    Traditional Structuring for Reverse and Improvement Exchange Prior to the Safe Harbor 
    Prior to the issuance of this Rev. Proc. in 2000, there was some case law on Reverse and Property Improvement Exchanges. The gist of which was that it could be done via a title parking arrangement, but it was necessary for the third-party parking Accommodator to have true “benefits and burdens” of ownership. This was a very high bar to reach and required such things as: 

    Risk of gain or loss required should the market value change over the term of the parking arrangement 

    “Skin in the game” from the Accommodator, often thought to be a minimum of 5% of the equity 

    Lease of the property back to the Exchanger during the parking term with true economics and arm’s length dealing 

    Exchanger could not be the agent of the accommodator 

    Exchanger could not simply provide a blanket guarantee on any bank loan made to the Accommodator for the purchase price and/or cost of improvements 

    As can be imagined, meeting these criteria suggested by the case law was hard to do. The 2000 regulations changed most of this and for all intents and purposes just required the Accommodator to be in legal title during the 180 term of the transaction. Simplifying the requirements provided many Exchangers the ability to enter into these parking arrangements without tax risk. 
    Rev. Proc. Position on Structuring Outside the Safe Harbor 
    The regulations recognized that it was not always possible to have a parking transaction be concluded within 180 days. For example, in the case of new construction or property improvements, it takes time to get architect plans, permits, deal with inclement weather conditions, etc. Taking this into consideration, the Regs included a paragraph suggesting that “no (adverse) inference” was to be made for deals structured outside the safe harbor, specifically it states: 
    “No inference is intended with respect to the federal income tax treatment of arrangements similar to those described in this revenue procedure that were entered into prior to the effective date of this revenue procedure. Further, the Service recognizes that “parking” transactions can be accomplished outside of the safe harbor provided in this revenue procedure. Accordingly, no inference is intended with respect to the federal income tax treatment of “parking” transactions that do not satisfy the terms of the safe harbor provided in this revenue procedure, whether entered into prior to or after the effective date of this revenue procedure.”
    This language was meant to leave the window open for matters that required more than 180 days to accomplish a completed exchange. For transactions that could only be done for a period in excess of 180 days, the only practical way was to resort to the benefits and burdens approach referred to above and, as before, that was difficult to adhere to. 
    The Case of Estate of George H. Bartell, Jr. v. Commissioner, 147 T.C. No. 5 (2016) 
    As so many times before, the landscape for these transactions changed once again with the ruling in the Bartell case that was issued in 2016. That case pertained to a taxpayer who structured an exchange involving new construction with a corresponding parking arrangement for 24 months. The actual period ended up being 17 months. Unlike traditional deals outside the safe harbor, it did not have benefits and burdens built in, rather it merely had a third-party Accommodator, referred to by the Court as a “warehousing” entity, hold title during the parking term. Predictably, the IRS challenged the tax reporting since it did not comply with historical requirements for a structure outside the safe harbor. However, the Federal District Court examined some cases on the subject and reached the conclusion that the case law primarily required a third party to be in title to the property during the period of construction. 
    This finding by the Court was a radical departure from what practitioners expected and opened up the door to many more parking transactions to be structured following the Bartell model. While the IRS was bound by the decision, it expressed its continuing disagreement with the holding by filing a “non-acquiesce” to the decision, meaning that it did not agree to be bound by it in other cases. This meant that persons in other Federal Districts could not necessarily rely on the case holding as applicable law. 
    However, gradually since 2016 real estate investors and business owners have been structuring deals requiring more than 180 days in conformity with the Bartell decision. At this time in 2024, such a matter being done outside the safe harbor is somewhat commonplace and certainly the IRS is aware that it happens. A lot of time has elapsed since the case holding and there is no evidence that the IRS has disallowed this structure since then so it would seem that a parking arrangement that uses an Accommodator but does not require benefits and burdens to that party, is indeed possible.  
    Like all tax related matters that are not the equivalent of a published safe harbor, it is always recommended to seek advice from your professional advisers to ensure that any perceived tax risk is properly assessed. 
     
    The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice. 

  • Reverse and Property Improvement Exchanges Outside the Safe Harbor 

    Reverse and Property Improvement Exchanges Outside the Safe Harbor 

    Evolution 
    The idea that an exchange of a like kind property for another should not subject a Taxpayer, or Exchanger, to a tax payment so long as they did not “cash out” formed the basis for Section 1031 to become part of the Tax Code in 1921. At one time almost all asset types could be exchanged, but in the present era, only real estate can be exchanged. The rationale for this tax deferral was based on the fact that the Exchanger maintained a “continuity of investment” in the asset, and it would be unfair to assess a tax under the circumstances of maintaining the investment in the “like kind” property. Then, as well as now, applicable taxes were deferred until some final cash out disposition, if any. 
    There were additions to the Code section over time but there were still a lot of open questions as the use of §1031 gathered steam over the years. In 1991, the IRS sought to provide more certainty on what could or could not be done and promulgated some regulations to provide a safe harbor that people could follow when entering into a tax deferred exchange. The 1991 regulations included distinct safe harbors:  

    Security or Guaranty Arrangements 

    Qualified Escrow and Qualified Trust Accounts 

    Use of Qualified Intermediaries 

    Interest and Growth Factors 

    During a comment period before the 1991 rules came into effect, many people wrote in to the Internal Revenue Service (IRS) asking if the final rules could provide some guidance when circumstances dictated that the Replacement Property needed to be acquired before the sale of the Relinquished Property, commonly referred to as a Reverse Exchange, or when a portion of the Relinquished Property sale proceeds needed to be allocated to construction or improvement on the new property, a Construction or Improvement exchange. The IRS replied to these comments by declining to include such guidance but indicated that it would continue to study the issue and provide rules on it in the future. It took some time, but in the year 2000, that guidance was published in Revenue Procedure 2000-37.
    Safe Harbor for Reverse and Improvement Exchanges 
    Like the Forward Exchange Rules before it, IRS Rev. Proc. 2000-37 provided a new safe harbor for Reverse and Construction/Improvement Exchanges. Among other things, the rules required having a third party, referred to as an Exchange Accommodation Titleholder, park title to the subject property as part of the necessary structure. Also, it was a condition of the safe harbor that the transaction, including the title parking arrangement, could go on no longer than 180 days. 
    Traditional Structuring for Reverse and Improvement Exchange Prior to the Safe Harbor 
    Prior to the issuance of this Rev. Proc. in 2000, there was some case law on Reverse and Property Improvement Exchanges. The gist of which was that it could be done via a title parking arrangement, but it was necessary for the third-party parking Accommodator to have true “benefits and burdens” of ownership. This was a very high bar to reach and required such things as: 

    Risk of gain or loss required should the market value change over the term of the parking arrangement 

    “Skin in the game” from the Accommodator, often thought to be a minimum of 5% of the equity 

    Lease of the property back to the Exchanger during the parking term with true economics and arm’s length dealing 

    Exchanger could not be the agent of the accommodator 

    Exchanger could not simply provide a blanket guarantee on any bank loan made to the Accommodator for the purchase price and/or cost of improvements 

    As can be imagined, meeting these criteria suggested by the case law was hard to do. The 2000 regulations changed most of this and for all intents and purposes just required the Accommodator to be in legal title during the 180 term of the transaction. Simplifying the requirements provided many Exchangers the ability to enter into these parking arrangements without tax risk. 
    Rev. Proc. Position on Structuring Outside the Safe Harbor 
    The regulations recognized that it was not always possible to have a parking transaction be concluded within 180 days. For example, in the case of new construction or property improvements, it takes time to get architect plans, permits, deal with inclement weather conditions, etc. Taking this into consideration, the Regs included a paragraph suggesting that “no (adverse) inference” was to be made for deals structured outside the safe harbor, specifically it states: 
    “No inference is intended with respect to the federal income tax treatment of arrangements similar to those described in this revenue procedure that were entered into prior to the effective date of this revenue procedure. Further, the Service recognizes that “parking” transactions can be accomplished outside of the safe harbor provided in this revenue procedure. Accordingly, no inference is intended with respect to the federal income tax treatment of “parking” transactions that do not satisfy the terms of the safe harbor provided in this revenue procedure, whether entered into prior to or after the effective date of this revenue procedure.”
    This language was meant to leave the window open for matters that required more than 180 days to accomplish a completed exchange. For transactions that could only be done for a period in excess of 180 days, the only practical way was to resort to the benefits and burdens approach referred to above and, as before, that was difficult to adhere to. 
    The Case of Estate of George H. Bartell, Jr. v. Commissioner, 147 T.C. No. 5 (2016) 
    As so many times before, the landscape for these transactions changed once again with the ruling in the Bartell case that was issued in 2016. That case pertained to a taxpayer who structured an exchange involving new construction with a corresponding parking arrangement for 24 months. The actual period ended up being 17 months. Unlike traditional deals outside the safe harbor, it did not have benefits and burdens built in, rather it merely had a third-party Accommodator, referred to by the Court as a “warehousing” entity, hold title during the parking term. Predictably, the IRS challenged the tax reporting since it did not comply with historical requirements for a structure outside the safe harbor. However, the Federal District Court examined some cases on the subject and reached the conclusion that the case law primarily required a third party to be in title to the property during the period of construction. 
    This finding by the Court was a radical departure from what practitioners expected and opened up the door to many more parking transactions to be structured following the Bartell model. While the IRS was bound by the decision, it expressed its continuing disagreement with the holding by filing a “non-acquiesce” to the decision, meaning that it did not agree to be bound by it in other cases. This meant that persons in other Federal Districts could not necessarily rely on the case holding as applicable law. 
    However, gradually since 2016 real estate investors and business owners have been structuring deals requiring more than 180 days in conformity with the Bartell decision. At this time in 2024, such a matter being done outside the safe harbor is somewhat commonplace and certainly the IRS is aware that it happens. A lot of time has elapsed since the case holding and there is no evidence that the IRS has disallowed this structure since then so it would seem that a parking arrangement that uses an Accommodator but does not require benefits and burdens to that party, is indeed possible.  
    Like all tax related matters that are not the equivalent of a published safe harbor, it is always recommended to seek advice from your professional advisers to ensure that any perceived tax risk is properly assessed. 
     
    The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice. 

  • Reverse and Property Improvement Exchanges Outside the Safe Harbor 

    Reverse and Property Improvement Exchanges Outside the Safe Harbor 

    Evolution 
    The idea that an exchange of a like kind property for another should not subject a Taxpayer, or Exchanger, to a tax payment so long as they did not “cash out” formed the basis for Section 1031 to become part of the Tax Code in 1921. At one time almost all asset types could be exchanged, but in the present era, only real estate can be exchanged. The rationale for this tax deferral was based on the fact that the Exchanger maintained a “continuity of investment” in the asset, and it would be unfair to assess a tax under the circumstances of maintaining the investment in the “like kind” property. Then, as well as now, applicable taxes were deferred until some final cash out disposition, if any. 
    There were additions to the Code section over time but there were still a lot of open questions as the use of §1031 gathered steam over the years. In 1991, the IRS sought to provide more certainty on what could or could not be done and promulgated some regulations to provide a safe harbor that people could follow when entering into a tax deferred exchange. The 1991 regulations included distinct safe harbors:  

    Security or Guaranty Arrangements 

    Qualified Escrow and Qualified Trust Accounts 

    Use of Qualified Intermediaries 

    Interest and Growth Factors 

    During a comment period before the 1991 rules came into effect, many people wrote in to the Internal Revenue Service (IRS) asking if the final rules could provide some guidance when circumstances dictated that the Replacement Property needed to be acquired before the sale of the Relinquished Property, commonly referred to as a Reverse Exchange, or when a portion of the Relinquished Property sale proceeds needed to be allocated to construction or improvement on the new property, a Construction or Improvement exchange. The IRS replied to these comments by declining to include such guidance but indicated that it would continue to study the issue and provide rules on it in the future. It took some time, but in the year 2000, that guidance was published in Revenue Procedure 2000-37.
    Safe Harbor for Reverse and Improvement Exchanges 
    Like the Forward Exchange Rules before it, IRS Rev. Proc. 2000-37 provided a new safe harbor for Reverse and Construction/Improvement Exchanges. Among other things, the rules required having a third party, referred to as an Exchange Accommodation Titleholder, park title to the subject property as part of the necessary structure. Also, it was a condition of the safe harbor that the transaction, including the title parking arrangement, could go on no longer than 180 days. 
    Traditional Structuring for Reverse and Improvement Exchange Prior to the Safe Harbor 
    Prior to the issuance of this Rev. Proc. in 2000, there was some case law on Reverse and Property Improvement Exchanges. The gist of which was that it could be done via a title parking arrangement, but it was necessary for the third-party parking Accommodator to have true “benefits and burdens” of ownership. This was a very high bar to reach and required such things as: 

    Risk of gain or loss required should the market value change over the term of the parking arrangement 

    “Skin in the game” from the Accommodator, often thought to be a minimum of 5% of the equity 

    Lease of the property back to the Exchanger during the parking term with true economics and arm’s length dealing 

    Exchanger could not be the agent of the accommodator 

    Exchanger could not simply provide a blanket guarantee on any bank loan made to the Accommodator for the purchase price and/or cost of improvements 

    As can be imagined, meeting these criteria suggested by the case law was hard to do. The 2000 regulations changed most of this and for all intents and purposes just required the Accommodator to be in legal title during the 180 term of the transaction. Simplifying the requirements provided many Exchangers the ability to enter into these parking arrangements without tax risk. 
    Rev. Proc. Position on Structuring Outside the Safe Harbor 
    The regulations recognized that it was not always possible to have a parking transaction be concluded within 180 days. For example, in the case of new construction or property improvements, it takes time to get architect plans, permits, deal with inclement weather conditions, etc. Taking this into consideration, the Regs included a paragraph suggesting that “no (adverse) inference” was to be made for deals structured outside the safe harbor, specifically it states: 
    “No inference is intended with respect to the federal income tax treatment of arrangements similar to those described in this revenue procedure that were entered into prior to the effective date of this revenue procedure. Further, the Service recognizes that “parking” transactions can be accomplished outside of the safe harbor provided in this revenue procedure. Accordingly, no inference is intended with respect to the federal income tax treatment of “parking” transactions that do not satisfy the terms of the safe harbor provided in this revenue procedure, whether entered into prior to or after the effective date of this revenue procedure.”
    This language was meant to leave the window open for matters that required more than 180 days to accomplish a completed exchange. For transactions that could only be done for a period in excess of 180 days, the only practical way was to resort to the benefits and burdens approach referred to above and, as before, that was difficult to adhere to. 
    The Case of Estate of George H. Bartell, Jr. v. Commissioner, 147 T.C. No. 5 (2016) 
    As so many times before, the landscape for these transactions changed once again with the ruling in the Bartell case that was issued in 2016. That case pertained to a taxpayer who structured an exchange involving new construction with a corresponding parking arrangement for 24 months. The actual period ended up being 17 months. Unlike traditional deals outside the safe harbor, it did not have benefits and burdens built in, rather it merely had a third-party Accommodator, referred to by the Court as a “warehousing” entity, hold title during the parking term. Predictably, the IRS challenged the tax reporting since it did not comply with historical requirements for a structure outside the safe harbor. However, the Federal District Court examined some cases on the subject and reached the conclusion that the case law primarily required a third party to be in title to the property during the period of construction. 
    This finding by the Court was a radical departure from what practitioners expected and opened up the door to many more parking transactions to be structured following the Bartell model. While the IRS was bound by the decision, it expressed its continuing disagreement with the holding by filing a “non-acquiesce” to the decision, meaning that it did not agree to be bound by it in other cases. This meant that persons in other Federal Districts could not necessarily rely on the case holding as applicable law. 
    However, gradually since 2016 real estate investors and business owners have been structuring deals requiring more than 180 days in conformity with the Bartell decision. At this time in 2024, such a matter being done outside the safe harbor is somewhat commonplace and certainly the IRS is aware that it happens. A lot of time has elapsed since the case holding and there is no evidence that the IRS has disallowed this structure since then so it would seem that a parking arrangement that uses an Accommodator but does not require benefits and burdens to that party, is indeed possible.  
    Like all tax related matters that are not the equivalent of a published safe harbor, it is always recommended to seek advice from your professional advisers to ensure that any perceived tax risk is properly assessed. 
     
    The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice. 

  • Reverse and Property Improvement Exchanges Outside the Safe Harbor 

    Reverse and Property Improvement Exchanges Outside the Safe Harbor 

    Evolution 
    The idea that an exchange of a like kind property for another should not subject a Taxpayer, or Exchanger, to a tax payment so long as they did not “cash out” formed the basis for Section 1031 to become part of the Tax Code in 1921. At one time almost all asset types could be exchanged, but in the present era, only real estate can be exchanged. The rationale for this tax deferral was based on the fact that the Exchanger maintained a “continuity of investment” in the asset, and it would be unfair to assess a tax under the circumstances of maintaining the investment in the “like kind” property. Then, as well as now, applicable taxes were deferred until some final cash out disposition, if any. 
    There were additions to the Code section over time but there were still a lot of open questions as the use of §1031 gathered steam over the years. In 1991, the IRS sought to provide more certainty on what could or could not be done and promulgated some regulations to provide a safe harbor that people could follow when entering into a tax deferred exchange. The 1991 regulations included distinct safe harbors:  

    Security or Guaranty Arrangements 

    Qualified Escrow and Qualified Trust Accounts 

    Use of Qualified Intermediaries 

    Interest and Growth Factors 

    During a comment period before the 1991 rules came into effect, many people wrote in to the Internal Revenue Service (IRS) asking if the final rules could provide some guidance when circumstances dictated that the Replacement Property needed to be acquired before the sale of the Relinquished Property, commonly referred to as a Reverse Exchange, or when a portion of the Relinquished Property sale proceeds needed to be allocated to construction or improvement on the new property, a Construction or Improvement exchange. The IRS replied to these comments by declining to include such guidance but indicated that it would continue to study the issue and provide rules on it in the future. It took some time, but in the year 2000, that guidance was published in Revenue Procedure 2000-37.
    Safe Harbor for Reverse and Improvement Exchanges 
    Like the Forward Exchange Rules before it, IRS Rev. Proc. 2000-37 provided a new safe harbor for Reverse and Construction/Improvement Exchanges. Among other things, the rules required having a third party, referred to as an Exchange Accommodation Titleholder, park title to the subject property as part of the necessary structure. Also, it was a condition of the safe harbor that the transaction, including the title parking arrangement, could go on no longer than 180 days. 
    Traditional Structuring for Reverse and Improvement Exchange Prior to the Safe Harbor 
    Prior to the issuance of this Rev. Proc. in 2000, there was some case law on Reverse and Property Improvement Exchanges. The gist of which was that it could be done via a title parking arrangement, but it was necessary for the third-party parking Accommodator to have true “benefits and burdens” of ownership. This was a very high bar to reach and required such things as: 

    Risk of gain or loss required should the market value change over the term of the parking arrangement 

    “Skin in the game” from the Accommodator, often thought to be a minimum of 5% of the equity 

    Lease of the property back to the Exchanger during the parking term with true economics and arm’s length dealing 

    Exchanger could not be the agent of the accommodator 

    Exchanger could not simply provide a blanket guarantee on any bank loan made to the Accommodator for the purchase price and/or cost of improvements 

    As can be imagined, meeting these criteria suggested by the case law was hard to do. The 2000 regulations changed most of this and for all intents and purposes just required the Accommodator to be in legal title during the 180 term of the transaction. Simplifying the requirements provided many Exchangers the ability to enter into these parking arrangements without tax risk. 
    Rev. Proc. Position on Structuring Outside the Safe Harbor 
    The regulations recognized that it was not always possible to have a parking transaction be concluded within 180 days. For example, in the case of new construction or property improvements, it takes time to get architect plans, permits, deal with inclement weather conditions, etc. Taking this into consideration, the Regs included a paragraph suggesting that “no (adverse) inference” was to be made for deals structured outside the safe harbor, specifically it states: 
    “No inference is intended with respect to the federal income tax treatment of arrangements similar to those described in this revenue procedure that were entered into prior to the effective date of this revenue procedure. Further, the Service recognizes that “parking” transactions can be accomplished outside of the safe harbor provided in this revenue procedure. Accordingly, no inference is intended with respect to the federal income tax treatment of “parking” transactions that do not satisfy the terms of the safe harbor provided in this revenue procedure, whether entered into prior to or after the effective date of this revenue procedure.”
    This language was meant to leave the window open for matters that required more than 180 days to accomplish a completed exchange. For transactions that could only be done for a period in excess of 180 days, the only practical way was to resort to the benefits and burdens approach referred to above and, as before, that was difficult to adhere to. 
    The Case of Estate of George H. Bartell, Jr. v. Commissioner, 147 T.C. No. 5 (2016) 
    As so many times before, the landscape for these transactions changed once again with the ruling in the Bartell case that was issued in 2016. That case pertained to a taxpayer who structured an exchange involving new construction with a corresponding parking arrangement for 24 months. The actual period ended up being 17 months. Unlike traditional deals outside the safe harbor, it did not have benefits and burdens built in, rather it merely had a third-party Accommodator, referred to by the Court as a “warehousing” entity, hold title during the parking term. Predictably, the IRS challenged the tax reporting since it did not comply with historical requirements for a structure outside the safe harbor. However, the Federal District Court examined some cases on the subject and reached the conclusion that the case law primarily required a third party to be in title to the property during the period of construction. 
    This finding by the Court was a radical departure from what practitioners expected and opened up the door to many more parking transactions to be structured following the Bartell model. While the IRS was bound by the decision, it expressed its continuing disagreement with the holding by filing a “non-acquiesce” to the decision, meaning that it did not agree to be bound by it in other cases. This meant that persons in other Federal Districts could not necessarily rely on the case holding as applicable law. 
    However, gradually since 2016 real estate investors and business owners have been structuring deals requiring more than 180 days in conformity with the Bartell decision. At this time in 2024, such a matter being done outside the safe harbor is somewhat commonplace and certainly the IRS is aware that it happens. A lot of time has elapsed since the case holding and there is no evidence that the IRS has disallowed this structure since then so it would seem that a parking arrangement that uses an Accommodator but does not require benefits and burdens to that party, is indeed possible.  
    Like all tax related matters that are not the equivalent of a published safe harbor, it is always recommended to seek advice from your professional advisers to ensure that any perceived tax risk is properly assessed. 
     
    The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice. 

  • Reverse and Property Improvement Exchanges Outside the Safe Harbor 

    Reverse and Property Improvement Exchanges Outside the Safe Harbor 

    Evolution 
    The idea that an exchange of a like kind property for another should not subject a Taxpayer, or Exchanger, to a tax payment so long as they did not “cash out” formed the basis for Section 1031 to become part of the Tax Code in 1921. At one time almost all asset types could be exchanged, but in the present era, only real estate can be exchanged. The rationale for this tax deferral was based on the fact that the Exchanger maintained a “continuity of investment” in the asset, and it would be unfair to assess a tax under the circumstances of maintaining the investment in the “like kind” property. Then, as well as now, applicable taxes were deferred until some final cash out disposition, if any. 
    There were additions to the Code section over time but there were still a lot of open questions as the use of §1031 gathered steam over the years. In 1991, the IRS sought to provide more certainty on what could or could not be done and promulgated some regulations to provide a safe harbor that people could follow when entering into a tax deferred exchange. The 1991 regulations included distinct safe harbors:  

    Security or Guaranty Arrangements 

    Qualified Escrow and Qualified Trust Accounts 

    Use of Qualified Intermediaries 

    Interest and Growth Factors 

    During a comment period before the 1991 rules came into effect, many people wrote in to the Internal Revenue Service (IRS) asking if the final rules could provide some guidance when circumstances dictated that the Replacement Property needed to be acquired before the sale of the Relinquished Property, commonly referred to as a Reverse Exchange, or when a portion of the Relinquished Property sale proceeds needed to be allocated to construction or improvement on the new property, a Construction or Improvement exchange. The IRS replied to these comments by declining to include such guidance but indicated that it would continue to study the issue and provide rules on it in the future. It took some time, but in the year 2000, that guidance was published in Revenue Procedure 2000-37.
    Safe Harbor for Reverse and Improvement Exchanges 
    Like the Forward Exchange Rules before it, IRS Rev. Proc. 2000-37 provided a new safe harbor for Reverse and Construction/Improvement Exchanges. Among other things, the rules required having a third party, referred to as an Exchange Accommodation Titleholder, park title to the subject property as part of the necessary structure. Also, it was a condition of the safe harbor that the transaction, including the title parking arrangement, could go on no longer than 180 days. 
    Traditional Structuring for Reverse and Improvement Exchange Prior to the Safe Harbor 
    Prior to the issuance of this Rev. Proc. in 2000, there was some case law on Reverse and Property Improvement Exchanges. The gist of which was that it could be done via a title parking arrangement, but it was necessary for the third-party parking Accommodator to have true “benefits and burdens” of ownership. This was a very high bar to reach and required such things as: 

    Risk of gain or loss required should the market value change over the term of the parking arrangement 

    “Skin in the game” from the Accommodator, often thought to be a minimum of 5% of the equity 

    Lease of the property back to the Exchanger during the parking term with true economics and arm’s length dealing 

    Exchanger could not be the agent of the accommodator 

    Exchanger could not simply provide a blanket guarantee on any bank loan made to the Accommodator for the purchase price and/or cost of improvements 

    As can be imagined, meeting these criteria suggested by the case law was hard to do. The 2000 regulations changed most of this and for all intents and purposes just required the Accommodator to be in legal title during the 180 term of the transaction. Simplifying the requirements provided many Exchangers the ability to enter into these parking arrangements without tax risk. 
    Rev. Proc. Position on Structuring Outside the Safe Harbor 
    The regulations recognized that it was not always possible to have a parking transaction be concluded within 180 days. For example, in the case of new construction or property improvements, it takes time to get architect plans, permits, deal with inclement weather conditions, etc. Taking this into consideration, the Regs included a paragraph suggesting that “no (adverse) inference” was to be made for deals structured outside the safe harbor, specifically it states: 
    “No inference is intended with respect to the federal income tax treatment of arrangements similar to those described in this revenue procedure that were entered into prior to the effective date of this revenue procedure. Further, the Service recognizes that “parking” transactions can be accomplished outside of the safe harbor provided in this revenue procedure. Accordingly, no inference is intended with respect to the federal income tax treatment of “parking” transactions that do not satisfy the terms of the safe harbor provided in this revenue procedure, whether entered into prior to or after the effective date of this revenue procedure.”
    This language was meant to leave the window open for matters that required more than 180 days to accomplish a completed exchange. For transactions that could only be done for a period in excess of 180 days, the only practical way was to resort to the benefits and burdens approach referred to above and, as before, that was difficult to adhere to. 
    The Case of Estate of George H. Bartell, Jr. v. Commissioner, 147 T.C. No. 5 (2016) 
    As so many times before, the landscape for these transactions changed once again with the ruling in the Bartell case that was issued in 2016. That case pertained to a taxpayer who structured an exchange involving new construction with a corresponding parking arrangement for 24 months. The actual period ended up being 17 months. Unlike traditional deals outside the safe harbor, it did not have benefits and burdens built in, rather it merely had a third-party Accommodator, referred to by the Court as a “warehousing” entity, hold title during the parking term. Predictably, the IRS challenged the tax reporting since it did not comply with historical requirements for a structure outside the safe harbor. However, the Federal District Court examined some cases on the subject and reached the conclusion that the case law primarily required a third party to be in title to the property during the period of construction. 
    This finding by the Court was a radical departure from what practitioners expected and opened up the door to many more parking transactions to be structured following the Bartell model. While the IRS was bound by the decision, it expressed its continuing disagreement with the holding by filing a “non-acquiesce” to the decision, meaning that it did not agree to be bound by it in other cases. This meant that persons in other Federal Districts could not necessarily rely on the case holding as applicable law. 
    However, gradually since 2016 real estate investors and business owners have been structuring deals requiring more than 180 days in conformity with the Bartell decision. At this time in 2024, such a matter being done outside the safe harbor is somewhat commonplace and certainly the IRS is aware that it happens. A lot of time has elapsed since the case holding and there is no evidence that the IRS has disallowed this structure since then so it would seem that a parking arrangement that uses an Accommodator but does not require benefits and burdens to that party, is indeed possible.  
    Like all tax related matters that are not the equivalent of a published safe harbor, it is always recommended to seek advice from your professional advisers to ensure that any perceived tax risk is properly assessed. 
     
    The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice. 

  • Reverse and Property Improvement Exchanges Outside the Safe Harbor 

    Reverse and Property Improvement Exchanges Outside the Safe Harbor 

    Evolution 
    The idea that an exchange of a like kind property for another should not subject a Taxpayer, or Exchanger, to a tax payment so long as they did not “cash out” formed the basis for Section 1031 to become part of the Tax Code in 1921. At one time almost all asset types could be exchanged, but in the present era, only real estate can be exchanged. The rationale for this tax deferral was based on the fact that the Exchanger maintained a “continuity of investment” in the asset, and it would be unfair to assess a tax under the circumstances of maintaining the investment in the “like kind” property. Then, as well as now, applicable taxes were deferred until some final cash out disposition, if any. 
    There were additions to the Code section over time but there were still a lot of open questions as the use of §1031 gathered steam over the years. In 1991, the IRS sought to provide more certainty on what could or could not be done and promulgated some regulations to provide a safe harbor that people could follow when entering into a tax deferred exchange. The 1991 regulations included distinct safe harbors:  

    Security or Guaranty Arrangements 

    Qualified Escrow and Qualified Trust Accounts 

    Use of Qualified Intermediaries 

    Interest and Growth Factors 

    During a comment period before the 1991 rules came into effect, many people wrote in to the Internal Revenue Service (IRS) asking if the final rules could provide some guidance when circumstances dictated that the Replacement Property needed to be acquired before the sale of the Relinquished Property, commonly referred to as a Reverse Exchange, or when a portion of the Relinquished Property sale proceeds needed to be allocated to construction or improvement on the new property, a Construction or Improvement exchange. The IRS replied to these comments by declining to include such guidance but indicated that it would continue to study the issue and provide rules on it in the future. It took some time, but in the year 2000, that guidance was published in Revenue Procedure 2000-37.
    Safe Harbor for Reverse and Improvement Exchanges 
    Like the Forward Exchange Rules before it, IRS Rev. Proc. 2000-37 provided a new safe harbor for Reverse and Construction/Improvement Exchanges. Among other things, the rules required having a third party, referred to as an Exchange Accommodation Titleholder, park title to the subject property as part of the necessary structure. Also, it was a condition of the safe harbor that the transaction, including the title parking arrangement, could go on no longer than 180 days. 
    Traditional Structuring for Reverse and Improvement Exchange Prior to the Safe Harbor 
    Prior to the issuance of this Rev. Proc. in 2000, there was some case law on Reverse and Property Improvement Exchanges. The gist of which was that it could be done via a title parking arrangement, but it was necessary for the third-party parking Accommodator to have true “benefits and burdens” of ownership. This was a very high bar to reach and required such things as: 

    Risk of gain or loss required should the market value change over the term of the parking arrangement 

    “Skin in the game” from the Accommodator, often thought to be a minimum of 5% of the equity 

    Lease of the property back to the Exchanger during the parking term with true economics and arm’s length dealing 

    Exchanger could not be the agent of the accommodator 

    Exchanger could not simply provide a blanket guarantee on any bank loan made to the Accommodator for the purchase price and/or cost of improvements 

    As can be imagined, meeting these criteria suggested by the case law was hard to do. The 2000 regulations changed most of this and for all intents and purposes just required the Accommodator to be in legal title during the 180 term of the transaction. Simplifying the requirements provided many Exchangers the ability to enter into these parking arrangements without tax risk. 
    Rev. Proc. Position on Structuring Outside the Safe Harbor 
    The regulations recognized that it was not always possible to have a parking transaction be concluded within 180 days. For example, in the case of new construction or property improvements, it takes time to get architect plans, permits, deal with inclement weather conditions, etc. Taking this into consideration, the Regs included a paragraph suggesting that “no (adverse) inference” was to be made for deals structured outside the safe harbor, specifically it states: 
    “No inference is intended with respect to the federal income tax treatment of arrangements similar to those described in this revenue procedure that were entered into prior to the effective date of this revenue procedure. Further, the Service recognizes that “parking” transactions can be accomplished outside of the safe harbor provided in this revenue procedure. Accordingly, no inference is intended with respect to the federal income tax treatment of “parking” transactions that do not satisfy the terms of the safe harbor provided in this revenue procedure, whether entered into prior to or after the effective date of this revenue procedure.”
    This language was meant to leave the window open for matters that required more than 180 days to accomplish a completed exchange. For transactions that could only be done for a period in excess of 180 days, the only practical way was to resort to the benefits and burdens approach referred to above and, as before, that was difficult to adhere to. 
    The Case of Estate of George H. Bartell, Jr. v. Commissioner, 147 T.C. No. 5 (2016) 
    As so many times before, the landscape for these transactions changed once again with the ruling in the Bartell case that was issued in 2016. That case pertained to a taxpayer who structured an exchange involving new construction with a corresponding parking arrangement for 24 months. The actual period ended up being 17 months. Unlike traditional deals outside the safe harbor, it did not have benefits and burdens built in, rather it merely had a third-party Accommodator, referred to by the Court as a “warehousing” entity, hold title during the parking term. Predictably, the IRS challenged the tax reporting since it did not comply with historical requirements for a structure outside the safe harbor. However, the Federal District Court examined some cases on the subject and reached the conclusion that the case law primarily required a third party to be in title to the property during the period of construction. 
    This finding by the Court was a radical departure from what practitioners expected and opened up the door to many more parking transactions to be structured following the Bartell model. While the IRS was bound by the decision, it expressed its continuing disagreement with the holding by filing a “non-acquiesce” to the decision, meaning that it did not agree to be bound by it in other cases. This meant that persons in other Federal Districts could not necessarily rely on the case holding as applicable law. 
    However, gradually since 2016 real estate investors and business owners have been structuring deals requiring more than 180 days in conformity with the Bartell decision. At this time in 2024, such a matter being done outside the safe harbor is somewhat commonplace and certainly the IRS is aware that it happens. A lot of time has elapsed since the case holding and there is no evidence that the IRS has disallowed this structure since then so it would seem that a parking arrangement that uses an Accommodator but does not require benefits and burdens to that party, is indeed possible.  
    Like all tax related matters that are not the equivalent of a published safe harbor, it is always recommended to seek advice from your professional advisers to ensure that any perceived tax risk is properly assessed. 
     
    The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice. 

  • Brent Abrahm, CEO of Accruit, Named 2024 Colorado Titan 100

    Brent Abrahm, CEO of Accruit, Named 2024 Colorado Titan 100

    We are pleased to announce that Brent Abrahm, CEO of Accruit, an Inspira Financial solution, was named a 2024 Colorado Titan 100 by Titan CEO. The Titan 100 program recognizes Colorado’s Top 100 CEOs & C-level executives using criteria that includes demonstrating extraordinary vision, leadership, and passion. “These preeminent leaders have built a distinguished reputation that is unrivaled in their field. We proudly recognize the Titan 100 for their efforts to shape the future of the Colorado business community. Their achievements create a profound impact that makes an extraordinary difference for their employees and clients across the nation.” says Jaime Zawmon, President of Titan CEO.
    Altogether, 2024 Colorado Titan 100 honorees and their companies employ over 74,000 people and generate over $43 billion in annual revenues. Accruit is proud to have Brent Abrahm acknowledged and honored for the hard work and leadership observed daily to not only the company, but the 1031 exchange industry as a whole.
    Co-founder, President & CEO of Accruit, Brent Abrahm is a pioneer in developing innovative Qualified Intermediary programs for 1031 Exchanges for a Fortune 500 Company. Brent’s commitment to driving business forward and using redirection as a catalyst for growth is unmatched. In 2017, personal property exchanges were removed from the tax code as part of the Tax Cuts and Jobs Act, as well as nearly 75% of Accruit’s revenue. Many leaders would throw in the towel at what seems to be the end of the road. However, Brent’s adaptability was instrumental in identifying the power and nimbleness of technology, which lead to Accruit replacing all lost revenue by the end of 2019 through focusing solely on real estate 1031 Exchanges. This was accomplished by the programming and patenting of Exchange Manager ProSM, Accruit’s 1031 Exchange software that accurately streamlines the exchange process. By building on the competitive edge patented software brings, Accruit has outpaced competitors who have focused on real estate 1031 Exchanges for decades. From 2019 to 2023, commercial real estate transactions were down 22%, 1031 Exchange transactions were up 15%, and Accruit grew its transactions 84%. 
    When asked what Brent’s 5-year vision is for Accruit, he stated, “Accruit will participate in every 1031 exchange through one of our technology workflows supporting a consistent safe-harbor transaction.  Accruit is investing in people, processes and technology that encourages 1031s transacted through an embedded QI service as a back-office workflow that supports economic growth while reducing friction in real estate transactions.  This will be the way all real estate investments are transacted.”
    In addition to his success and undeniable leadership at Accruit, Brent has been involved with the Federation of Exchange Accommodators (FEA) for over 20 years. He joined the board of directors, rose to President in 2010, and was awarded the FEA President’s Award in 2009 & 2016, a distinction that recognizes the individual’s dedication and service to FEA members as well as the 1031 Exchange industry. After his FEA presidency, Brent has not wavered in his commitment to the FEA and industry as a co-chair of the Government Affairs Commitee for five years, he continues to travel to Washington D.C., lobbying for Section 1031 to various administrations who propose hard limits on exchanges. In addition to these industry accolades, Brent has created a workplace where employees are proud and excited to work and provide top-tier customer service. Both Accruit employees and their clients give the company a world-class designation as defined by Net Promoter Score.   
    “Have patience with a disruptive idea. Invest in the right people and surround yourself with the brightest minds who support your vision while effectively testing and challenging your plan and don’t hesitate to move on from those who don’t meet this criterion.” – Brent Abrahm
    The awards celebration where recipients are honored will be held at Magness Arena in Denver, CO on May 30th, 2024.

  • Brent Abrahm, CEO of Accruit, Named 2024 Colorado Titan 100

    Brent Abrahm, CEO of Accruit, Named 2024 Colorado Titan 100

    We are pleased to announce that Brent Abrahm, CEO of Accruit, an Inspira Financial solution, was named a 2024 Colorado Titan 100 by Titan CEO. The Titan 100 program recognizes Colorado’s Top 100 CEOs & C-level executives using criteria that includes demonstrating extraordinary vision, leadership, and passion. “These preeminent leaders have built a distinguished reputation that is unrivaled in their field. We proudly recognize the Titan 100 for their efforts to shape the future of the Colorado business community. Their achievements create a profound impact that makes an extraordinary difference for their employees and clients across the nation.” says Jaime Zawmon, President of Titan CEO.
    Altogether, 2024 Colorado Titan 100 honorees and their companies employ over 74,000 people and generate over $43 billion in annual revenues. Accruit is proud to have Brent Abrahm acknowledged and honored for the hard work and leadership observed daily to not only the company, but the 1031 exchange industry as a whole.
    Co-founder, President & CEO of Accruit, Brent Abrahm is a pioneer in developing innovative Qualified Intermediary programs for 1031 Exchanges for a Fortune 500 Company. Brent’s commitment to driving business forward and using redirection as a catalyst for growth is unmatched. In 2017, personal property exchanges were removed from the tax code as part of the Tax Cuts and Jobs Act, as well as nearly 75% of Accruit’s revenue. Many leaders would throw in the towel at what seems to be the end of the road. However, Brent’s adaptability was instrumental in identifying the power and nimbleness of technology, which lead to Accruit replacing all lost revenue by the end of 2019 through focusing solely on real estate 1031 Exchanges. This was accomplished by the programming and patenting of Exchange Manager ProSM, Accruit’s 1031 Exchange software that accurately streamlines the exchange process. By building on the competitive edge patented software brings, Accruit has outpaced competitors who have focused on real estate 1031 Exchanges for decades. From 2019 to 2023, commercial real estate transactions were down 22%, 1031 Exchange transactions were up 15%, and Accruit grew its transactions 84%. 
    When asked what Brent’s 5-year vision is for Accruit, he stated, “Accruit will participate in every 1031 exchange through one of our technology workflows supporting a consistent safe-harbor transaction.  Accruit is investing in people, processes and technology that encourages 1031s transacted through an embedded QI service as a back-office workflow that supports economic growth while reducing friction in real estate transactions.  This will be the way all real estate investments are transacted.”
    In addition to his success and undeniable leadership at Accruit, Brent has been involved with the Federation of Exchange Accommodators (FEA) for over 20 years. He joined the board of directors, rose to President in 2010, and was awarded the FEA President’s Award in 2009 & 2016, a distinction that recognizes the individual’s dedication and service to FEA members as well as the 1031 Exchange industry. After his FEA presidency, Brent has not wavered in his commitment to the FEA and industry as a co-chair of the Government Affairs Commitee for five years, he continues to travel to Washington D.C., lobbying for Section 1031 to various administrations who propose hard limits on exchanges. In addition to these industry accolades, Brent has created a workplace where employees are proud and excited to work and provide top-tier customer service. Both Accruit employees and their clients give the company a world-class designation as defined by Net Promoter Score.   
    “Have patience with a disruptive idea. Invest in the right people and surround yourself with the brightest minds who support your vision while effectively testing and challenging your plan and don’t hesitate to move on from those who don’t meet this criterion.” – Brent Abrahm
    The awards celebration where recipients are honored will be held at Magness Arena in Denver, CO on May 30th, 2024.

  • Brent Abrahm, CEO of Accruit, Named 2024 Colorado Titan 100

    Brent Abrahm, CEO of Accruit, Named 2024 Colorado Titan 100

    We are pleased to announce that Brent Abrahm, CEO of Accruit, an Inspira Financial solution, was named a 2024 Colorado Titan 100 by Titan CEO. The Titan 100 program recognizes Colorado’s Top 100 CEOs & C-level executives using criteria that includes demonstrating extraordinary vision, leadership, and passion. “These preeminent leaders have built a distinguished reputation that is unrivaled in their field. We proudly recognize the Titan 100 for their efforts to shape the future of the Colorado business community. Their achievements create a profound impact that makes an extraordinary difference for their employees and clients across the nation.” says Jaime Zawmon, President of Titan CEO.
    Altogether, 2024 Colorado Titan 100 honorees and their companies employ over 74,000 people and generate over $43 billion in annual revenues. Accruit is proud to have Brent Abrahm acknowledged and honored for the hard work and leadership observed daily to not only the company, but the 1031 exchange industry as a whole.
    Co-founder, President & CEO of Accruit, Brent Abrahm is a pioneer in developing innovative Qualified Intermediary programs for 1031 Exchanges for a Fortune 500 Company. Brent’s commitment to driving business forward and using redirection as a catalyst for growth is unmatched. In 2017, personal property exchanges were removed from the tax code as part of the Tax Cuts and Jobs Act, as well as nearly 75% of Accruit’s revenue. Many leaders would throw in the towel at what seems to be the end of the road. However, Brent’s adaptability was instrumental in identifying the power and nimbleness of technology, which lead to Accruit replacing all lost revenue by the end of 2019 through focusing solely on real estate 1031 Exchanges. This was accomplished by the programming and patenting of Exchange Manager ProSM, Accruit’s 1031 Exchange software that accurately streamlines the exchange process. By building on the competitive edge patented software brings, Accruit has outpaced competitors who have focused on real estate 1031 Exchanges for decades. From 2019 to 2023, commercial real estate transactions were down 22%, 1031 Exchange transactions were up 15%, and Accruit grew its transactions 84%. 
    When asked what Brent’s 5-year vision is for Accruit, he stated, “Accruit will participate in every 1031 exchange through one of our technology workflows supporting a consistent safe-harbor transaction.  Accruit is investing in people, processes and technology that encourages 1031s transacted through an embedded QI service as a back-office workflow that supports economic growth while reducing friction in real estate transactions.  This will be the way all real estate investments are transacted.”
    In addition to his success and undeniable leadership at Accruit, Brent has been involved with the Federation of Exchange Accommodators (FEA) for over 20 years. He joined the board of directors, rose to President in 2010, and was awarded the FEA President’s Award in 2009 & 2016, a distinction that recognizes the individual’s dedication and service to FEA members as well as the 1031 Exchange industry. After his FEA presidency, Brent has not wavered in his commitment to the FEA and industry as a co-chair of the Government Affairs Commitee for five years, he continues to travel to Washington D.C., lobbying for Section 1031 to various administrations who propose hard limits on exchanges. In addition to these industry accolades, Brent has created a workplace where employees are proud and excited to work and provide top-tier customer service. Both Accruit employees and their clients give the company a world-class designation as defined by Net Promoter Score.   
    “Have patience with a disruptive idea. Invest in the right people and surround yourself with the brightest minds who support your vision while effectively testing and challenging your plan and don’t hesitate to move on from those who don’t meet this criterion.” – Brent Abrahm
    The awards celebration where recipients are honored will be held at Magness Arena in Denver, CO on May 30th, 2024.

  • Understanding How Biden’s Proposed Budget Impacts 1031 Exchanges

    Understanding How Biden’s Proposed Budget Impacts 1031 Exchanges

    Biden’s Budget on 1031 Exchanges 
    The US Department of Treasury released their General Explanations of President Biden’s FY 2025 Budget, also referred to as the “Green Book”, which proposes hard limits be set on IRC Section 1031. The proposed budget suggests that 1031 Exchanges are a loophole, as they delay the payment of tax on real estate transactions as long as the Exchanger continues reinvesting in real estate. It is believed that this equates to an interest-free loan from the government, potentially indefinitely, and real estate is the only asset that gets this “sweetheart deal.” The proposal would permit deferrals of gain up to an aggregate amount of $500,000 for individuals ($1 million for married couples filing jointly) annually for similar real estate exchanges. Any gains from 1031 Exchanges above $500,000 (or $1 million for married couples filing jointly) in a year would be recognized in the year the Exchanger transfers the real property and subject to tax.  
    Effect on 1031 Exchanges 
    If a $500,000 cap on 1031 Exchanges were to be implemented, research shows it would have negative economic consequences. Below are a few of the many reasons why a $500,000 limit on 1031 Exchanges would be harmful to the economy: 
    Impact on Real Estate Investment and Liquidity: In real estate transactions, 1031 Exchanges are often utilized to defer capital gains taxes, motivating property owners to reinvest in other properties. However, setting a cap of $500,000 on these exchanges might hinder investors’ ability to engage in larger and more complex transactions, potentially reducing liquidity in the real estate market. 
    Reduced Property Transactions: A limit might dissuade property owners from engaging in 1031 Exchanges due to the potential of increased tax burdens. Consequently, this could lead to a decrease in property transactions, in turn, slowing economic activity within the real estate sector. 
    Potential Negative Effect on Small Businesses: Setting a limit on 1031 Exchanges could have a negative, disproportionate impact on small businesses, as well as investors who depend on 1031 Exchanges in managing their property portfolios. Biden’s cap could hinder investors’ means to expand, relocate, or optimize their property holdings.  
    Impact on Economic Growth: 1031 Exchange research shows that they stimulate economic growth by promoting investment, job creation, and improvements to properties, thus improvements to neighborhoods, cities, etc. Setting a hard cap on 1031 Exchanges would impede these economic accelerators.  
    A