IRS Ruling Partly Clears up Property Exchange Issue

WASHINGTON, DC-The IRS has issued a document outlining its position on so-called “reverse” deferred or Starker exchanges of property. The issue concerns how to structure certain exchanges of like-kind property while successfully deferring taxable gains.

Tax rules have required the exchange to be simultaneous or to identify and acquire replacement properties shortly afterwards. However, taxpayers have often found it necessary to acquire the replacement property before selling their current property–a “reverse” deferred exchange that was not addressed by tax rules. Taxpayers have often used third-party intermediaries to hold replacement properties in “parking transactions,” but this has not always satisfied tax regulators.

In the new rule, the IRS has outlined rules for structuring exchanges with such third-party intermediaries so as to preserve tax benefits. The rules do not answer all questions raised about Starker exchanges, and exchanges may be structured differently without losing the tax benefits, according to the consulting firm Arthur Andersen.