In PLR 200820017 and PLR 200820025, both issued on February 7, 2008 and published on May 19, 2008, the IRS ruled once again that indirect exchanges through a QI between related parties were permitted, despite limited boot, when both parties agreed to hold their respective replacement properties for at least two years.
In PLR 200820017, a publicly traded Real Estate Investment Trust (REIT) that operates as an UPREIT, owns 89% of a limited partnership (“LP”), and the REIT acts as LP’s general partner. LP, in turn, owns a direct 99% in “Taxpayer,” a limited liability company. In addition, LP owns 99.9% of “Affiliate,” which in turn, owns the remaining 1% of Taxpayer.
Therefore, according to our math, LP owns 99.999% of Taxpayer. Taxpayer owns a 99-year lease with 75 years remaining.
It proposes to sell that property through a QI, and it will acquire two replacement properties from LP. LP, in turn, will engage in its own like-kind exchange, through a QI. With the proceeds from the sale of the two properties to Taxpayer, LP will acquire other like-kind property from a third-party, but it may receive some limited boot in the process. Unfortunately, the amount of potential boot (expressed as a percent of the gain realized) has been purged from the published version of this private letter
ruling, so no guidance is provided as to the amount of boot that the IRS considers to be acceptable., however, we do know that it is certainly less than the gain realized by the related party. Both the Taxpayer and LP will hold onto their respective replacement properties for not less than two years after the exchange.
In PLR 200820025, a publicly traded Real Estate Investment Trust (REIT) that operates as an UPREIT owns 89% of a limited partnership (the “Taxpayer”), and the REIT acts as the Taxpayer’s general partner. In this case, the Taxpayer sold an office building through a QI in the first leg of a like-kind exchange. One of the Taxpayer’s replacement properties will be a retail condominium owned by “Company.” Company is a subsidiary of the same REIT that owns 89% of the Taxpayer. Company will engage in its own like-kind exchange through a QI. It will acquire replacement property from a third-party. Both Taxpayer and Company will hold their respective replacement properties for a minimum of two years. Company may realize some limited taxable boot. Again, the maximum amount of that boot as a percentage of the realized gain has been deleted from the published version of the PLR.
In both cases (as in previous similar rulings), the IRS has ruled that the exchange is not a like-kind exchange between related parties that would be subject to the restrictions of §1031(f), because the parties exchanged through a QI and not directly with each other. The IRS went on to hold that neither transaction is subject to §1031(f)(4) because the transactions were not
structured in order to avoid the purposes of §1031(f), provided that neither party disposed of its replacement property within two years. In both cases the IRS also held that receipt of limited cash boot by the related party would not invalidate the exchange under §1031(f)(4). Therefore, both transactions were approved.
It may be inferred from both letter rulings that 100% of the incidental boot received will be subject to tax and that the boot received will not exceed the realized gain. Therefore, presumably, no proceeds from basis shifting have been cashed out. This may account for the willingness of the IRS to accept limited boot in these and other similar transactions.