Do You Need to Exceed the 180 Day Exchange Period?

Most exchanges are completed pursuant to Section 1031 of the Internal Revenue Code, its regulations and timeframes, and the Qualified Intermediary Safe Harbor. However, that doesn't mean exchanges outside of the safe harbor are not possible. They are. In fact, exchanges which take place outside of the restrictions of the safe harbor are some of the most interesting and compelling transactions, often achieving huge benfits for the Exchangers who complete them.

Clearly, the most obvious benefit to attempting an exchange outside of the safe harbor restrictions, is to go past the standard 180 day exchange period.

That said, once you've decided to go outside of the safe harbor there are two ways to approach your exchange. One is considered a Safe option, and the other is the Safer option, based upon case law, meaning creating an exchange structure, when if examined will pass the scrutiny of the IRS.

The Safer option means following the existing parameters which arose as a result of the Bartell case. This was an exchange completed by the Bartell Drug Company in the Pacific Northwest where they took seventeen months to complete the construction of a new pharmacy before they sold another pharmacy and completed and reported the transaction as an exchange.

The completed exchange, once reported, was disallowed by the Internal Revenue Service and the entire transaction ultimately ended up being litigated in tax court.

Long story short, the Bartell Drug Company prevailed in tax court and the IRS decided, not bto appeal the decision. Therefore, the approaches and logistics utilized within the Bartell reverse construction exchnage are now considered to represent a Safe approach, should an Exchanger wish to attempt a non safe harbor reverse construction exchange.

Prior to the Bartell case, we utilized what is known as the Safer option, essentially, recognizing the accumulated case law which had been substantially tested and litigated since the codififcation of Section 1031 into the Internal Reveue Code back in 1984.

Many of the logistical variables between the two option deal with how property parking arrangements are structured and how the tax oriented ownership of parked properties are held by Exchange Accommodation Titleholders sufficiently to satisfy the 'burdens and benefits test' of the IRS.

A Huge Caveat

If you are considering a non safe harbor exchange, you need to prepare yourself and your transaction for added scrutiny. Also, such an exchange will require some extensive planning and the assistance of qualified legal and tax counsel. This will also translate into much larger costs and expenses.

Lastly, but most importantly, the Qualified Intermediary who assist you needs to be properly prepared and experienced with these much more complex exchage approaches. Within the United States, the amount of firms capable of handling these complex and sophisticated non safe harbor transactions can probably be counted on one hand. So unless you are working, or associated with an established firm who routinely completes exchanges outside of the safe harbor, do yourself and your tax preparer a favor and stick with a standard forward exchange, completed within the statute 180 day exchange period.