When it is not possible to carry out the transaction within the typical 180-day period, such as major construction project, or unique properties, you will need a Parking Arrangement. This type of transaction is by its very nature, much more complex and deals in those situations when the amount of taxable gain may be very large.
Replacement property can be acquired and parked with a qualified intermediary (QI), as defined in Regs. Section 1.1031(k)-I (g)(4), or more likely, an affiliate of a QI. The funding for the property would typically come from guarantees or loans of the taxpayer (or from entities related to the taxpayer). There would typically be indemnifications against liabilities and loss and often puts and calls, so that the parking entity would not get stuck with the property, or the parking entity could refuse to transfer the property to the taxpayer. The replacement property would be net leased to the taxpayer, and there would be offsets of rentals against debt service on the loan.
A Parking Exchange is acknowledged by the IRS for long term business arrangements where businesses or individuals may acquire and/or construct facilities that would take more than months to acquire or construct. This includes the time necessary for due diligence, zoning approval, government approval and loan restructuring. No two of these transactions are alike and each transaction must be structured to fit your needs. It is important for clients not to try to use related parties in parking exchanges.
Despite complexity or size, you will need a solution tailor made for your parking exchange. We are available at any time by telephone, fax, e-mail or in person to answer your questions.
*This frequently occurring situation has caused taxpayers to wonder whether they could engage in a reverse exchange in which the replacement property is acquired first.
*In a typical negotiation between the parking entity and the taxpayer, the former would attempt to limit its risk as much as possible, and the latter would insist that there needs be some risk on the part of the parking entity to make it work from a federal tax viewpoint. The overall arrangements might vary significantly from arm’s length arrangements. The issue of concern is whether from a federal tax viewpoint, the parking entity would be treated as the agent of the taxpayer. In situations where the taxpayer negotiated with the seller of the replacement property, there might also be a Court Holding issue Alternatively, the taxpayer might currently transfer the relinquished property to the parking entity in exchange for the replacement property, with the parking entity holding the relinquished property until such time as a buyer could be found.
