Taxpayers looking to limit the amount of tax paid on the sale of property often choose to enter into a Section 1031 Exchange instead of a traditional sale. If a transaction qualifies for Section 1031 Exchange treatment, then capital gains taxes are deferred. In a Reverse 1031 Exchange, the replacement property is acquired first and then the property to be exchanged is relinquished. As part of the 1031 Exchange process, an Exchange Accommodator Titleholder, or EAT, takes title to either the relinquished or the replacement property during the course of the transaction because the Exchangor cannot hold the title to both the relinquished and replacement property at the same time. Often referred to as “parking the title,” this practice can have unintended tax consequences if a taxpayer is not careful. Specific to each state is the potential of a transfer tax when the parked property is conveyed to the EAT.
In Florida, for example, a transfer tax, known as a stamp tax, must be paid when the title to property exchanges hands under normal circumstances. The stamp tax applies to the exchange of property as well as the sale of property:
12B-4.013 Conveyances Subject to Tax.
“(1) Exchange of Property: In an exchange of real property by the respective owners of the property exchanged, lands are given as consideration for the transfer of other lands between the parties. The consideration has a reasonably determinable value, (DeVore v. Gay, 39 So.2d 796 (Fla. 1949)) and is property other than money. The consideration for each deed is the fair market value of the property transferred up by the transferor plus any other consideration given.”
Although the stamp tax applies to a traditional exchange of property, the State of Florida has made an exception for Reverse 1031 Exchanges. The Florida Reverse 1031 Exchange Rules are based on Technical Assistance Advisement No. 05B4-006, Florida Technical Assistance Advisement No. 07M-001 and other similar Advisements issued by the Florida Department of Revenue, or FDR. In Florida, an Advisement is similar to Private Letter Rulings issued by the Internal Revenue Service. In response a question regarding whether a stamp tax was due as a result of a Reverse 1031 Exchange transaction, the FDR stated the following:
“The IRS has ruled that as part of a Section 1031 exchange, there cannot be an agency relationship between the parties to the transaction. However, the IRS has ruled that treating an exchange accommodation titleholder as an agent for state tax transfer purposes, but no other purpose, will not affect the qualification of a transaction under Section 1031. Therefore, the inclusion of a statement in the Real Estate Acquisition Agreement that the qualified exchange accommodator is acting as the Taxpayer’s agent will exempt the transaction under the principal agent exemption. However, if such statement were not included, the Department would take the same position as the IRS that there is no principal agent exemption.”
A taxpayer who wishes to avoid payment of the stamp tax in a Florida Reverse 1031 Exchange should take note of the requirement that a statement should be included in the Real Estate Acquisition Agreement or Purchase and Sale Agreement (PSA) to avoid incurring the tax.
For realtors and taxpayers who are considering a reverse, deferred improvement or forward 1031 exchange, visit the Atlas 1031 web site to secure the correct assignment to include in the Real Estate Acquisition Agreement or PSA. If you have a question about a reverse 1031 exchange or a construction/build to suit exchange, click on the button below for a response to your question or a complimentary consultation. Anticipate an answer within twelve hours or less from a Certified Exchange Specialist© who has been accommodating 1031 tax deferred exchanges since 2003.
