Philadelphia Of Counsel Dave Shechtman was quoted in a Tax News Today article titled, “ABA Meeting: Questions Persist About Constructive Receipt In Like-Kind Exchanges.” The article discusses questions posed by practitioners and IRS officials in regards to safe harbors and loan structures in deferred section 1031 exchanges of real estate. Taxpayers who have actual or constructive receipt of exchange proceeds will lose the benefit of section 1031 and must pay tax on gains recognized in their exchanges.
Because the money in the exchange account is restricted, the taxpayer cannot directly, or indirectly, borrow, receive or pledge the money. Branch 4 senior counsel, IRS Office of Associate Chief Counsel, Steve Toomey, says “loan structures that rely on the money in the exchange account for collateral are potentially problematic.”
Dave, who chaired the panel at the meeting, posed a hypothetical transaction where a “taxpayer owns two properties and needs a loan to improve the property that is not in a section 1031 exchange, and the lender seeks an agreement [whereby remaining] exchange funds will go into an account of the taxpayer’s over which the lender has a security interest. In the case that the taxpayer finds a replacement property, the lender receives a mortgage over the property.”
David and Donna Crisalli, senior level counsel, IRS Office of Associate Chief Counsel, also addressed the circumstances when a taxpayer who has made a contingent identification of replacement property may receive exchange funds.