Qualified Exchange Accommodation Arrangements
What Are Qualified Exchange Accommodation Arrangements?
A qualified exchange accommodation arrangement is a tax strategy where an outsider, known as the accommodation party, briefly holds a real estate investor's surrendered or replacement property. Qualified exchange accommodation arrangements, while as yet exposing investors to severe rules for the sale and purchase of like-kind properties, increase flexibility in the timing of sales, and work on qualifications for the tax deferral.
Figuring out Qualified Exchange Accommodation Arrangements
A qualified exchange accommodation arrangement (QEAA) empowers investors to follow section 1031 of the Internal Revenue Code, which permits investors to concede taking a capital gain or loss on the sale of real estate as long as the surrendered property is supplanted by a like-kind property.
Otherwise called a 1031 exchange, this transaction is a tax-deferred exchange that takes into consideration the disposal of an asset and the acquisition of one more comparable asset without generating a tax liability from the sale of the first asset.
A qualified exchange accommodation arrangement is a the ordinarily settled by an intermediary exchange accommodation titleholder (EAT). The EAT holds the property that was either surrendered or the property that was purchased, to permit time for the other half of the transaction to be settled. A qualified exchange accommodation arrangement is basically a holding arrangement for one of the two properties in a 1031 exchange.
This is one of the benefits of a qualified exchange accommodation arrangement since it considers flexibility in surrendering and getting like-kind properties so the properties can be held with the EAT until both are ready for the 1031 exchange. Thus, the arrangement assists investors with conceding realizing a capital gain or loss from the sale of real estate while permitting them to conform to section 1031 of the tax code. Notwithstanding, an exchange must be completed for a like-kind property. Likewise, there are limitations regarding the way that long the property can be held inside an EAT, and a tax professional ought to be counseled before endeavoring a 1031 exchange.
Properties and Qualified Exchange Accommodation Arrangements
This tax strategy was recognized by the IRS in 2000 yet recently was being used for a long time. IRS endorsement of the method and foundation of specific qualification rules made investor compliance with 1031 exchange rules more clear. Since the purpose of such transactions was to hold a property for a brief time, they likewise were known as warehouse transactions.
Before January 1, 2018, a 1031 exchange could incorporate the exchange of one business for another or one piece of substantial property for another. Be that as it may, with the entry of the Tax Cuts and Jobs Act (TCJA) in December 2017, a 1031 exchange is limited to real property. As such, other asset exchanges, including machinery, equipment, vehicles, fine art, collectibles, licenses, and other intellectual property as well as immaterial business assets never again fit the bill for like-kind exchange tax treatment.
Subsequently, a 1031 exchange can include an exchange of property with a like-kind property, and it must be for real estate held for investment or for useful use in a trade or business situated in the United States. Properties are of like-kind assuming they have a similar nature or character, even assuming that they contrast in quality.
As such, whether one property is improved or unchanged, they will commonly be viewed as like-kind. For instance, an apartment building would be viewed as like-kind for another apartment building. Notwithstanding, real property in the U.S. isn't viewed as like-kind to property outside the U.S.
Taxes and Qualified Exchange Accommodation Arrangements
Despite the fact that tax liability is deferred and no gain or loss is recognized, the 1031 exchange must be reported on Form 8824, Like-Kind Exchanges. Form 8824's directions make sense of how for report the subtleties of the 1031 exchange. Form 8824 assists the taxpayer with working out the amount of gain deferred because of the like-kind exchange.
Section 1031 permits an investor to give or receive cash, liabilities, or other property that isn't like-kind notwithstanding the like-kind real estate exchanged. Cash, liabilities, or other property that isn't like-kind and that is given or received in a 1031 exchange is called boot. Boot triggers taxable gains or losses in the time of the exchange.
As such, in the event that a person additionally receives other (not like-kind) property or money, (as part of the exchange), it must be recognized as a gain to the degree of the other property and money received. Notwithstanding, the taxpayer can't perceive a loss.
The taxable amount that isn't deferred by Section 1031 is the amount of the boot. The taxable amount that is deferred by Section 1031 is the capital gain or loss on the like-kind real estate exchanged. Gain recognized on the grounds that the boot was received is reported on Form 8949, Schedule D on Form 1040, or Form 4797, as applicable. In the event that depreciation must be recovered, this recognized gain might need to be reported as ordinary income.
Exchange Accommodation Titleholder
In the event that under a qualified exchange accommodation arrangement, the property is moved to an exchange accommodation titleholder (EAT) and held in a QEAA, the EAT turns into the beneficial owner of the property. Even however there's an intermediary, the tax benefits of the like-kind exchange actually apply.
As per the IRS, property moved from the EAT to the investor might be treated as property that was received in an exchange, and the property moved to the EAT might be treated as a property surrendered in an exchange. This may likewise be true if the property due to be received is moved to the EAT before the property to be surrendered is moved to the accommodation titleholder.
- A 1031 exchange is when investors can concede taking a capital gain or loss on the sale of real estate as long as the surrendered property is supplanted by a like-kind property.
- A qualified exchange accommodation arrangement is the point at which an outsider briefly holds a real estate investor's surrendered or replacement property.
- The arrangement assists investors with conceding a realized capital gain or loss from the sale of real estate by permitting them to complete a like-kind exchange.