WHAT IS 'Qualified Exchange Accommodation Arrangements'

A qualified exchange accommodation arrangement is a tax strategy where a third party, known as the accommodation party, temporarily holds a real estate investor's relinquished or replacement property.

BREAKING DOWN 'Qualified Exchange Accommodation Arrangements'

A qualified exchange accommodation arrangement enables investors to comply with section 1031 of the Internal Revenue Code, which allows investors to defer taking a capital gain or loss on the sale of real estate as long as the relinquished property is replaced by a like-kind property. Also known as a 1031 exchange, this transaction is a tax-deferred exchange that allows for the disposal of an asset and the acquisition of another similar asset without generating a tax liability from the sale of the first asset. Qualified exchange accommodation arrangements, while still subjecting investors to strict guidelines for the sale and purchase of like-kind properties, increase flexibility in the timing of sales and simplify qualifications for the tax deferral.

Tax implications of qualified exchange accommodation

This strategy was recognized by the IRS in 2000 but previously was in use for many years. IRS approval of the procedure and establishment of specific qualification guidelines made investor compliance with 1031 exchange rules more straightforward. Because the purpose of such transactions was to hold a property temporarily, they also were known as warehouse transactions. Until passage of tax legislation in December 2017, this could include the exchange of one business for another or one piece of tangible property, such as artwork or heavy equipment, for another. Such an exchange since the 2017 tax reform is allowed only for one real estate investment property with a like-kind property and it must be for real estate held for investment or for productive use in a trade or business located in the United Sates.

Though tax is deferred and no gain or loss is recognized, the 1031 exchange must be reported on Form 8824, Like-Kind Exchanges. Form 8824's instructions explain how to report the details of the 1031 exchange. Section 1031 allows an investor to give or receive cash, liabilities or other property that is not like-kind in addition to the like-kind real estate exchanged. Cash, liabilities or other property that is not like-kind and that is given or received in a 1031 exchange is called boot. Boot triggers taxable gains or losses in the year of the exchange. The taxable amount that is not deferred by Section 1031 is the amount of the boot. The taxable amount that is deferred by Section 1031 is the capital gain or loss on the like-kind real estate exchanged. Gain recognized because boot was received is reported on Form 8949, Schedule D on Form 1040, or Form 4797, as applicable. If depreciation must be recaptured, then this recognized gain may have to be reported as ordinary income.

RELATED TERMS
  1. Like-Kind Exchange

    A like-kind exchange is a tax-deferred transaction that allows ...
  2. Boot

    Boot is an accounting term referring to cash or other property ...
  3. Recognized Loss

    Recognized loss is when investments are sold for less than their ...
  4. Replacement Property

    Replacement property is any property that is received as a replacement ...
  5. Section 1245

    Section 1245 is a tax law codified in the Internal Revenue Code ...
  6. Property Management

    Property management is the administration of residential, commercial ...
Related Articles
  1. Taxes

    Avoid Capital Gains Tax on Your Home Sale

    If you have property to sell and want to avoid capital gains tax, a Section 1031 exchange may be the answer.
  2. Taxes

    How To Prevent A Tax Hit When Selling A Rental Property

    Rental property ownership has its benefits but when selling you can face a big tax hit. Thankfully there are ways to reduce your capital gains exposure.
  3. Taxes

    10 Things to Know About 1031 Exchanges

    Real estate swaps grow popular, but traps are many. Here's 10 things to know when considering 1031 swaps. Also: Beware new rules on vacation homes.
  4. Tech

    How the New Tax Law Impacts Cryptocurrencies

    The federal tax code changes of 2017 have big implications for crypto investors, traders, issuers and miners.
  5. Investing

    How to Make the Most From Real Estate Investments

    If you own commercial real estate, there are ways to create extra income without extra work.
  6. Taxes

    Reducing Capital Gains Tax on Investment Property

    The 1031 exchange rules can help reduce or eliminate property gains taxes on investment property.
  7. Investing

    A Guide to Real Estate Investing

    Investing in real estate is a popular choice for good reasons, but it's more complicated than owning your typical stocks and bonds.
  8. Investing

    The Advantages of Real Estate Versus Stocks

    Real estate investments shouldn't be overlooked as a way to diversify a portfolio and help mitigate risk.
  9. Investing

    7 Steps to A Hot Commercial Real Estate Deal

    For savvy real estate investors, times of lower prices reveal investment opportunity.
Trading Center