Florida
In reverse 1031 exchanges and improvement exchanges, also known as “parking exchanges,” the parked property is effectively transferred twice to complete the exchange. For routine real estate sales and purchases, most states would charge a transfer tax on each transaction, unless an exemption applies. For state transfer tax purposes, one of the transfers involved in a parking exchange, the transfer from the Exchange Accommodation Titleholder (“EAT”) to the Exchanger or vice versa if the relinquished property is parked, is generally a transfer without monetary consideration. Some states recognize the exchange titleholder arrangement and explicitly provide a statutory or regulatory exemption, others explicitly do not, and several states lack clear guidance. The state of Florida has very specific guidance which is discussed in this article.
Federal Tax Treatment of the EAT and titleholder LLC
For federal tax purposes, the EAT needs to have qualified indicia of ownership of the replacement property throughout the parking period. For all other purposes, it can be an agent of the taxpayer. Our exchange documents/Qualified Exchange Accommodation Agreement incorporate this important concept from Rev. Proc. 2000-37. It is also important to note that qualified indicia of ownership is broadly defined and can entail holding title to the real estate or as owning all the membership interests in a single member LLC that holds title to real property and is disregarded for tax purposes.I
State Transfer Tax Treatment of the EAT and EAT LLC
In the states with transfer tax exceptions for transfers between the Exchanger and the EAT, the laws consider an EAT entity to be a temporary nominee or agent of the exchanging taxpayer. This causes a disparity between the federal tax treatment of the EAT (no agency) and the state/local transfer tax treatment (agent for transfer taxes). However, the good news is that the IRS addressed this in Rev. Proc. 2000-37 and in a subsequent Private Letter Ruling – PLR 200148042 (August 29, 2001):
“Accordingly, the inclusion of a statement in the QEA Agreement that “[LLC] is acting solely as [Customer’s] agent for all purposes except for federal income tax purposes” will have no adverse effect on the qualification of the QEA Agreement under Rev. Proc. 2000-37”
…
“ [LLC] is acting solely as [Customer’s] agent for all purposes, except for federal income tax purposes. It is believed that in many jurisdictions, this express agency statement (for non-federal income tax purposes) will help avoid additional transfer tax when, for example, LLC transfers legal title to property to its exchange customers.” PLR 200148042 explaining Rev. Proc. 2000-37
The absence of comprehensive guidance from certain state tax authorities regarding transfer taxes and parking exchanges can pose challenges. While it doesn’t constitute a state law or set a precedent for IRS purposes, the Private Letter Ruling (PLR) provides valuable insights. It highlights the disparity between the federal tax treatment of the Exchange Accommodation Titleholder (EAT), which doesn’t act as an agent, and the state/local transfer tax treatment, where it could be considered an agent under an exemption to state or local taxes.
Florida Stamp Taxes
Florida appears to expressly require a specific agency statement in the Qualified Exchange Accommodation Agreement and in the Purchase and Sale Agreements for an EAT to taxpayer transfer to be exempt from its transfer tax. This is the transfer of title or LLC interests that takes place at the completion of a reverse exchange. Therefore, the best practice is to include the below language or similar language in these agreements to avoid potential duplicate transfer taxes.
For details on the Florida requirement, please see Florida Technical Assistance Advisement No. 05B4-006 (October 3, 2005), Technical Assistance Advisement No. 06M-005 (October 31, 2006), and Technical Assistance Advisement No. 08B4-007 (October 24, 2008)(relinquished property parking exchange). Please note that the Florida Department of Revenue may also have published additional guidance on the issue.
If you are transacting a parking exchange with Legal 1031 EAT Holdings, prior to parking replacement property, please reach out to us regarding sample agency language and cooperation clauses to consider in your contract or addendums.
I For this purpose, “qualified indicia of ownership” means legal title to the property, other indicia of ownership of the property that are treated as beneficial ownership of the property under applicable principles of commercial law (e.g.,a contract for deed), or interests in an entity that is disregarded as an entity separate from its owner for federal income tax purposes (e.g., a single member limited liability company) and that holds either legal title to the property or such other indicia of ownership.
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Legal 1031 Exchange Services, LLC does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of your exchange transaction. Property owners must consult their tax and/or legal advisors for this information. Our role is limited to serving as qualified intermediary/accommodator to facilitate your exchange.
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