What Are Qualified Exchange Accommodation Arrangements?
Let me explain what a qualified exchange accommodation arrangement really is. It's a tax strategy where a third party, called the accommodation party, temporarily holds your relinquished or replacement property as a real estate investor. While you still have to follow strict guidelines for selling and buying like-kind properties, this setup gives you more flexibility in timing your sales and makes it easier to qualify for tax deferral.
Key Takeaways
- A 1031 exchange lets you defer capital gains or losses on real estate sales if you replace the property with a like-kind one.
- In a qualified exchange accommodation arrangement, a third party holds your relinquished or replacement property temporarily.
- This arrangement helps you defer realized capital gains or losses from real estate sales by completing a like-kind exchange.
Understanding Qualified Exchange Accommodation Arrangements
As an investor, you can use a qualified exchange accommodation arrangement (QEAA) to comply with section 1031 of the Internal Revenue Code. This section allows you to defer capital gains or losses on real estate sales as long as you replace the relinquished property with a like-kind one.
You might know this as a 1031 exchange—it's a tax-deferred transaction where you dispose of one asset and acquire a similar one without immediate tax liability from the sale.
Typically, an intermediary sets up the QEAA and becomes the exchange accommodation titleholder (EAT). The EAT holds either the property you're giving up or the one you're buying, giving you time to finalize the other part of the deal. Essentially, it's a holding setup for one of the properties in your 1031 exchange.
One key benefit is the flexibility it offers in timing when you relinquish and receive like-kind properties. The EAT can hold them until both are ready for the exchange. This way, you defer realizing capital gains or losses while staying compliant with section 1031. Remember, the exchange must involve like-kind properties, there are time limits on how long the EAT can hold the property, and you should consult a tax professional before proceeding.
Properties and Qualified Exchange Accommodation Arrangements
The IRS recognized this tax strategy in 2000, though it was used for years before that. With official approval and guidelines, it became easier for you as an investor to comply with 1031 rules. These were often called warehouse transactions because they involve temporarily holding a property.
Before January 1, 2018, 1031 exchanges could include swapping businesses or tangible properties. But the Tax Cuts and Jobs Act (TCJA) in December 2017 changed that—now, they're limited to real property. So, exchanges of machinery, equipment, vehicles, artwork, collectibles, patents, intellectual property, or intangible business assets no longer qualify.
Today, a 1031 exchange must involve like-kind real estate held for investment or productive use in a trade or business in the United States. Properties are like-kind if they share the same nature or character, regardless of quality differences. For instance, improved or unimproved properties are generally like-kind—an apartment building qualifies as like-kind to another apartment building. However, U.S. real property isn't like-kind to property outside the U.S.
Taxes and Qualified Exchange Accommodation Arrangements
Even though tax liability is deferred and no gain or loss is recognized immediately, you must report the 1031 exchange on Form 8824, Like-Kind Exchanges. The instructions for Form 8824 guide you on reporting details and calculating the deferred gain.
Taxable Events
Section 1031 lets you give or receive cash, liabilities, or non-like-kind property alongside the exchanged real estate. This non-like-kind addition is called boot, and it triggers taxable gains or losses in the exchange year.
If you receive boot, you recognize a gain to the extent of that boot, but you can't recognize a loss. The boot amount is taxable and not deferred under section 1031, while the like-kind exchange portion defers the capital gain or loss. Report recognized gains from boot on Form 8949, Schedule D of Form 1040, or Form 4797 as needed. If depreciation recapture applies, this gain might be ordinary income.
Exchange Accommodation Titleholder
In a QEAA, when property is transferred to an exchange accommodation titleholder (EAT) and held there, the EAT becomes the beneficial owner. Despite the intermediary, you still get the tax benefits of a like-kind exchange.
Per the IRS, property from the EAT to you can be treated as received in an exchange, and property to the EAT as relinquished. This holds even if the replacement property goes to the EAT before you transfer the relinquished one.
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