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Under
Section 1031
© 1999 KEITH G.
SWIRSKY
Step 1:
The qualified intermediary and
the taxpayer enter into an exchange agreement.
Step 2:
The taxpayer assigns its rights under the contract to sell
the relinquished property to the intermediary; the
intermediary accepts the assignment; the other party to the
contract is notified of the assignment.
Step 3:
The intermediary participates in the transfer of the
relinquished property to the buyer of that property; the
transfer may be accomplished by direct deeding from the
taxpayer to the buyer.
Step 4:
Within forty-five calendar days from the date of closing on
the relinquished property, the taxpayer provides notice to
the intermediary of the identity of the replacement
property.
Step 5:
The taxpayer negotiates a purchase contract for the
replacement property and assigns its rights under the
purchase contract to the intermediary; the intermediary
accepts the assignment; the other party to the contract is
notified of the assignment.
Step 6:
After the assignment of the purchase contract to the
intermediary, the intermediary makes the necessary deposit.
Step 7:
The intermediary participates in the transfer of the
replacement property to the taxpayer; at closing, direct
deeding from the seller to the taxpayer is permitted.
Footnotes:
1. Please
note that as a general rule Private Letter Rulings ("PLRs")
may not be cited as precedent. PLRs, however, do tend to
reveal the position of the IRS on controversial areas and
are useful for planning purposes even if they technically
can not be used in matters in controversy.
2. Revenue Rulings,
while reflective of the position of the IRS and eligible for
use as precedent, are not binding on courts and have a more
limited precedential value in such proceedings than court
cases. SDI Netherlands B.V. v. Commissioner, 107
T.C. 161 (1996).
3. Texas, Delaware, New
York and Maryland are all examples of states whose laws now
provide for the formation of single member LLC's. There is
little authority or reason to believe that other states will
not respect the distinct nature of such LLCs or the
limitation on liability, subject to the rules governing the
piercing of the corporate veil. In fact, it is arguable
whether a state could deny single member LLCs recognition
without running afoul of the U.S. Constitution.
4. These regulations
and the attendant prohibition on like kind exchange
treatment should also apply to interests in LLCs that are
treated as partnerships for federal tax purposes.
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