question about 1031 replacement strategy

[Jim Dealut]

I'm selling property in New York where I think the market has peaked and investing in properties in Pennsylvania.

My issue is that most of the properties I'm buying in the new state I'm buying at Tax sale or Foreclosure auction.. So, it's tough to time identifying my replacement properties in the 45 days after I sell my New York properties.

I know that you can buy properties as a part of your 1031 exchange from an LLC that you own less than 50% ..

So, my thinking it that I could buy the good deal properties in Pennsylvania when they come up at tax sale or foreclosure in an LLC that I own 50% of and then in the future. (Few months) when I sell one of my NY properties buy those properties from my 50% owned LLC for my replacement properties. (All cash no mortgages involved)

I would buy that from the 50/50 LLC for the original purchase price plus any expenses so that the LLC would not have any capital gains.

I guess my question is would the IRS have any issue seeing the Same LLC as the seller on multiple properties being bought at once and over time in multiple 1031 exchanges?

I hope this makes sense.

THanks

Jim

[Dave Foster]

@Jim Dealut, What your suggesting is actually a form of the reverse exchange mentioned by @Kevin Sobilo. Originally known as a "rutherford exchange", decades of reverse exchanges happened where a property was bought by an entity friendly with the exchanger (in your case that multi member LLC). The entity would hold the property for however long (in some cases years if construction was involved). And then it would sell to the exchanger to complete their 1031 exchange.

The IRS attempted to tighten this process down with Rev Proc 2000-37.  It offers a safe harbor for reverse exchange "parking transactions".  Under this rev proc the entity is spelled out.  It has to be the QI owning the entity.  But most importantly the exchanger has 180 days from the day the QI entity takes title to the new property to complete the sale of their old property and purchase of the new. 

When this safe harbor came out we saw 90% of our clients go that route - for a year.  Then the realities of the time constraints started to hit home.  and everyone went to the traditional "non safe harbor" exchanges.  Over the years the IRS has scrutinized these and limited them more and more.

Bottom line - Your scenario would be a parking arrangement that falls outside the safe harbor of 2000-37.  It might be possible.  But lawyer up in case.