Private Letter Ruling No. 2013-02009 (PLR 201302009)
Internal Revenue Service (IRS)
Private Letter Ruling (PLR)
Issue Date: October 10, 2012
Release Date: January 11, 2013
Section 1031 — Exchange of Property Held for Productive Use or Investment
State A =
Date 1 =
This responds to your request for a private letter ruling dated June 13, 2012. Your
request concerns the qualification of a transaction as a like-kind exchange under
Section 1031(a) of the Internal Revenue Code.
Taxpayer, a limited liability company treated as a partnership for federal income tax
purposes, owns all of LLC, a disregarded entity. LLC owns Complex in State A, which it
uses in its trade or business. On Date 1, Taxpayer refinanced existing mortgages and
encumbered the buildings in Complex with $X of 10 year nonrecourse loans issued by
Lenders. Because the current market value of Complex is believed to be less than the outstanding principal debt, Taxpayer has been negotiating to transfer title of Complex,
subject to the debt, to Lenders pursuant to the Transfer Agreement.
Taxpayer will enter into an exchange agreement with a qualified intermediary (QI) as
defined in Section 1.1031(k)-1(g)(4)1 of the regulations to accomplish an exchange intended to
qualify as a like-kind exchange under Section 1031 of the Code. QI will acquire and transfer
to Taxpayer like-kind replacement property approximately equal in value to the total
amount of the outstanding principal debt. Taxpayer will assign to QI its rights in the
Transfer Agreement with notice being given to Lenders. Taxpayer will enter into a
contract for the acquisition of the replacement property and the rights will be assigned to
the QI with notice being given to the seller of the replacement property. The
replacement property will then likely be acquired with cash (which Taxpayer would
transfer to, or on behalf of, the QI) and/or debt.
Section 1.1031(k)-1(g)(4)(v) provides that if a taxpayer enters into an agreement for the
transfer of relinquished property and thereafter assigns its rights in that agreement to an
intermediary and all parties to that agreement are notified in writing of the assignment
on or before the date of the transfer of the relinquished property, the intermediary is
treated as entering into that agreement. If the relinquished property is transferred pursuant to that agreement, the intermediary is treated as having acquired and transferred the relinquished property.
Consistent with the treatment of the QI as having acquired Complex, we rule that
Taxpayer's assignment of its rights in the Transfer Agreement to QI will be a transfer of
relinquished property for purposes of determining whether there is an "exchange of
property held for productive use in a trade or business or for investment" under Section 1031(a), notwithstanding that the fair market value of Complex is less than the principal amount of the outstanding nonrecourse debt.
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. Specifically, we express no opinion whether the proposed transaction
qualifies in all other respects for tax deferral under Section 1031 beyond what is expressly
stated in the above ruling. A copy of this letter ruling should be attached to the appropriate federal income tax returns for the taxable years in which the transactions described herein are consummated.
This letter ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.
In accordance with the Power of Attorney on file with this office, copies of this letter are
being sent to your authorized representatives.
Christina M. Glendening
Assistant to the Chief, Branch 4
Office of Associate Chief Counsel
(Income Tax & Accounting)
1 Section 1.1031(k)-1(g) of the regulations sets up four safe harbors, the use of which will prevent actual or constructive receipt of money or other property for purposes of Section 1031. Paragraph (g)(4) provides that one of these safe harbors is the qualified intermediary. Paragraph (g)(4)(iii) defines a qualified intermediary as a person who (A) is not the taxpayer or a disqualified person, and (B) enters into a written agreement with the taxpayer (the exchange agreement) and as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property and transfers the replacement property to the taxpayer.
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