Key Takeaways
- QEAA enables tax-deferral via third-party property holding.
- Exchange Accommodation Titleholder must be independent and taxable.
- Strict timing: 5-day agreement, 45-day ID, 180-day completion.
- Facilitates reverse 1031 exchanges with flexible property timing.
What is Qualified Exchange Accommodation Arrangements?
A Qualified Exchange Accommodation Arrangement (QEAA) is a legal mechanism allowing investors to defer capital gains taxes by temporarily transferring property title to an independent third party, known as the Exchange Accommodation Titleholder (EAT), during a like-kind exchange under IRS Section 1031.
This arrangement solves timing challenges when you need to acquire a replacement property before selling your current one, ensuring compliance with tax regulations.
Key Characteristics
QEAAs have distinct features that protect your transaction under IRS guidelines:
- Independent EAT: The EAT must be a third party unrelated by obligation or agency to the taxpayer, holding legal title during the exchange.
- Written Agreement: A formal QEAA contract is required within five days of property transfer to the EAT.
- Timing Deadlines: Replacement property identification must occur within 45 days, with the entire exchange completed in 180 days.
- Tax Reporting: Both taxpayer and EAT report ownership and disposition consistently for IRS compliance.
- Flexibility: Supports complex exchange types, including reverse and improvement exchanges.
How It Works
Typically, you start by assigning the purchase contract of a replacement property to the EAT, who then acquires and temporarily holds title. The EAT may lease the property back to you under a management agreement, enabling control without ownership conflicts.
After you sell your relinquished property, you buy the replacement from the EAT, completing the like-kind exchange. This process ensures your transaction meets IRS rules while allowing flexibility in timing and ownership.
Examples and Use Cases
QEAAs are particularly useful in real estate sectors where timing and title ownership are critical:
- Retail Properties: Investors purchasing properties leased to companies like Federal Realty Investment Trust use QEAAs to navigate complex leaseholds.
- Industrial Real Estate: Holdings involving tenants such as NNN benefit from QEAAs to manage exchanges without disrupting income streams.
- Land Development: Companies like Prologis utilize QEAAs when acquiring land parcels before disposing of other assets, ensuring tax deferral.
Important Considerations
When using a QEAA, ensure the EAT meets IRS independence rules and the agreement complies with Revenue Procedure 2000-37. Maintaining proper documentation and adhering to strict timelines is essential to avoid disqualification.
Consult tax professionals familiar with complex deferred acquisition costs and 1031 exchange nuances to optimize your transaction and safeguard tax benefits.
Final Words
Qualified Exchange Accommodation Arrangements provide a strategic solution to timing challenges in 1031 exchanges by using a neutral third party to hold property temporarily. To maximize benefits, consult with a tax professional to ensure all IRS requirements are met and to structure the arrangement properly.
Frequently Asked Questions
A QEAA is a legal framework that allows investors to defer capital gains taxes by temporarily parking property with an independent third party during a like-kind exchange under Section 1031 of the Internal Revenue Code.
A QEAA solves the timing problem by using an Exchange Accommodation Titleholder (EAT) who temporarily holds legal title to the replacement property, allowing the investor to complete the sale of their current property before acquiring the replacement.
The EAT must be an independent third party with no disqualifying relationship to the taxpayer, subject to federal income tax, and must maintain qualified indicia of ownership such as legal title or equivalent ownership under commercial law.
The QEAA agreement must be signed within 5 days after transferring property to the EAT, the replacement property must be identified within 45 days of the EAT taking title, and the entire exchange must be completed within 180 calendar days.
The agreement must state that the EAT holds title for the taxpayer's benefit to complete a Section 1031 exchange, and both parties must agree to report the acquisition, holding, and disposition of the property consistently on their tax returns.
In a reverse exchange, the EAT first acquires the replacement property using funds loaned or guaranteed by the investor, leases it back to the investor, and then sells it to the investor once the investor sells their relinquished property.
A QEAA agreement usually includes holding period specifications, lease agreements allowing the taxpayer to manage the property, financial arrangements such as loans between the EAT and taxpayer, and clear obligations and rights of both parties.
