Disclosure:  Easy on Sale, Not on Purchase

Tax advisors and intermediaries have for years advised that exchange transactions should be structured to have the same entity end up with title at both ends of a tax-deferred exchange. The I.R.S. has issued a Private Letter Ruling (PLR) which reflects common sense in this area and allows for a departure from this premise.

Lenders involved within exchanges often have difficult requirements which complicate the process. A Limited Partnership selling an office building and desiring to exchange it for multiple properties had such a lender. The lender required that each replacement property be subject to a separate loan and further, that each replacement property be held as the sole asset of a separate entity. The taxpayer proposed to go through an otherwise standard exchange process and asked the I.R.S. to review it.

Noting that a "single-owner non-corporate business entity is disregarded as a tax entity separate from the single owner for federal tax purposes" under current regulations, the I.R.S. ruled intelligently that they would treat the transactions of the single-owner, non-corporate entity (a "check the box" entity under §7701) as those of the single-owner.

Therefore, the limited partnership was able to exchange property which ended up in a different entity.

PLR's cannot be cited as precedent. This ruling gives some comfort to similar situations and may have ramifications for transactions that are similarly positioned, but not identical, such as where a husband and wife wish to transfer into their Grantor-type living trust, where such a transfer has no current tax ramifications and the entity holding is considered effectively as one-in-the same with the married couple. The common sense ruling is refreshing in any case.

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