7775. What is a simultaneous exchange of real estate? When will this type of exchange qualify as a like-kind exchange?Nuco Employeercline202014-07-14T17:34:00Z2014-07-14T17:34:00Z35423096Summit Business Media257363114Site Map/Investments/Real Estate/ExchangeTaxFactsDefaultArticle2005-05-04T00:00:00Z122681238-00-tf2.xml1238.00;#1930;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2Which transactions qualify as like-kind exchanges of real estate?38300.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T22:52:21Z7775. What is a simultaneous exchange of real estate? When will this type of exchange qualify as a like-kind exchange?The simplest form of real estate exchange is one in which parties “swap” properties they already own, but it is not necessarily the most common. Frequently, a person (A) who wishes to make an exchange can find a buyer (B) for the property, but not one who has property that A wants in return. The IRS has permitted a three-cornered solution to this problem as follows: A transfers property to B, B transfers property to C, and C transfers property to A.Rev. Rul. 57-244, 1957-1 CB 247. In a 2-party exchange, the IRS determined that the buyer (B) could acquire the property from a third person or construct a building specifically in order to exchange it for A’s property and that the resulting exchange could qualify with respect to A, provided B did not act as A’s agent.Rev. Rul. 75-291, 1975-2 CB 332. Such a transaction does not qualify as a like-kind exchange for B, who did not hold the property for business or investment but acquired it for exchange.Rev. Rul. 75-291, above; Rev. Rul. 77-297, 1977-2 CB 304. (Because B’s basis was the cost of acquiring the replacement property, however, B is unlikely to realize, and thus recognize, much gain anyway.)A number of variations on the three cornered exchange have been permitted. The Tax Court has determined that a third party’s property may be purchased by a fourth party intermediary who exchanges it for A’s property which it transfers to B for cash used to pay the third party. The transaction has been held an exchange even though the fourth party’s ownership was transitory.Barker v. Comm., 74 TC 555 (1980). See Garcia v. Comm., 80 TC 491 (1983), acq., 1984-1 CB 1. Similarly, a valid exchange would occur if several parties transfer their fragmented interests in real estate to an intermediary who then “reassembles” the interests and transfers whole interests back to the individuals where the total value of the replacement property is approximately equal to the total value of the relinquished property.Let. Rul. 9439007.Even if B, or a fourth party intermediary, is unable for some reason to acquire title to the third party’s property, but has only a right to buy it, transactions have been held exchanges where B directed the third party to transfer title to A, who simultaneously transferred his property to B.Biggs v. Comm., 69 TC 905 (1978), aff’d, 632 F.2d 1171 (5th Cir. 1980); Brauer v. Comm., 74 TC 1134 (1980). In these cases, cash paid the third party for property was transferred directly from B or the intermediary and not to or through A.See also W.D. Haden Co. v. Comm., 165 F.2d 588 (5th Cir. 1948). The IRS has held that such a transaction will qualify as a like-kind exchange.Rev. Rul. 90-34, 1990-1 CB 154. However, where the cash was paid to A who paid it to the third party, the transaction was held to be a sale and repurchase.Carlton v. U.S., 385 F.2d 238 (5th Cir. 1967).As the complexity of the transaction increases, so does the difficulty of distinguishing between exchanges and sales; in addition, the likelihood of a challenge by the IRS increases correspondingly. In three or four party exchanges, the IRS has sometimes taken the position that the exchange party is the agent of the taxpayer and that the taxpayer thus exchanged property with himself or herself, not qualifying for like-kind exchange treatment.See Garcia v. Comm., above; Rutland v. Comm. TC Memo 1977-8; Coupe v. Comm., 52 TC 394 (1969), acq., 1970-2 CB xix. For transfers of property on or after June 10, 1991, regulations provide a safe harbor designed to prevent such a characterization. The regulations state that in the case of simultaneous transfers of like-kind properties involving a qualified intermediary (as defined in Q 7776), the qualified intermediary will not be considered the agent of the taxpayer for purposes of IRC Section 1031(a).Treas. Reg. §1.1031(b)-2. This safe harbor is also available for deferred exchanges, as explained in Q 7776.