In a 'reverse' IRC § 1031 like-kind exchange, a specialized company (the exchange accommodation titleholder, or EAT) temporarily holds legal title to the replacement property until the taxpayer sells its old property. When the EAT later transfers that replacement property to the taxpayer, is that transfer itself subject to New York's Real Estate Transfer Tax (RETT)?

Plain-English summary

A company that acts as an "exchange accommodation titleholder" (EAT) in "reverse" like-kind exchanges asked the Department whether New York's Real Estate Transfer Tax (RETT) applied to its transfer of replacement property to a taxpayer (the "exchangor").

Under IRC § 1031, an exchangor can defer recognizing gain on the sale of business or investment property by exchanging it for "like-kind" replacement property. A "reverse" exchange happens when the exchangor acquires the replacement property before selling the property being given up (the "relinquished property") — something the federal statute itself doesn't directly address. IRS Revenue Procedures 2000-37 and 2004-51 fill that gap with a safe harbor: an independent EAT can hold legal title to the replacement property temporarily, structured through a "qualified exchange accommodation arrangement" (QEAA), without disturbing the exchange's tax-deferred treatment.

In the EAT's typical structure: the exchangor funds the EAT's purchase of the replacement property entirely (the EAT advances none of its own money); the EAT holds title only as the exchangor's agent, collecting a fee but bearing none of the property's gains, losses, or operating risk; a triple-net lease keeps the EAT financially neutral (rent from the exchangor exactly offsets the EAT's loan interest); and once the exchangor sells the relinquished property (through a separate qualified intermediary, or "QI"), the EAT conveys the replacement property to the exchangor to complete the exchange.

The Department's analysis: RETT applies under Tax Law § 1402(a) to conveyances of real property for consideration over $500, but Tax Law § 1405(b)(4) exempts conveyances made without consideration and not in connection with a sale (including bona fide gifts). Of the several transfers of title that happen in a reverse exchange, only two involve real consideration and are taxable: (1) the EAT's initial purchase of the replacement property, and (2) the sale of the relinquished property from the QI to the ultimate buyer. The intermediate step at issue here — the EAT conveying the replacement property to the exchangor — involves no real consideration, because the EAT is, in substance, just the exchangor's agent or nominee the whole time: it uses the exchangor's funds, takes on no economic risk, and passes the property through at no gain or loss. Because that transfer lacks genuine consideration, it qualifies for the § 1405(b)(4) exemption and no RETT is due on it.

What this means for you

The RETT hit in a reverse 1031 exchange comes at the "real" purchase/sale steps, not the EAT hand-off

If you're structuring a reverse like-kind exchange through a licensed EAT following the IRS safe harbor, expect RETT to apply to the EAT's initial acquisition of the replacement property and to the ultimate sale of your relinquished property to a third-party buyer — but not to the EAT's later transfer of the replacement property back to you, as long as the EAT genuinely functions as your agent with no real stake in the property.

The exemption turns on the EAT having zero economic exposure, not just paperwork labels

This ruling's exemption rested on specific facts: the EAT used only the exchangor's funds, bore no risk of gain or loss, was economically neutralized by a matching lease/loan-interest structure, and received only a fee. An EAT arrangement that deviates from these features (e.g., the EAT fronting its own capital, sharing in appreciation, or holding property beyond the safe-harbor time limits) may not qualify for the same treatment.

Structuring under the IRS safe harbor (Rev. Proc. 2000-37 / 2004-51) matters for the state tax result too

The Department's RETT analysis leaned directly on the exchangor's compliance with the federal QEAA safe-harbor requirements (title held by an EAT subject to federal income tax, an accommodation agreement within 5 business days, 45/180-day identification and completion deadlines, combined holding period capped at 180 days). Departing from those federal safe-harbor mechanics could undercut the "mere agent" characterization this RETT exemption depends on.

Common questions

Q: Does RETT apply every time title to real property changes hands during a reverse 1031 exchange?
A: No. Only the transfers involving real consideration are taxed — the EAT's purchase of the replacement property and the ultimate sale of the relinquished property to a buyer. The EAT's later conveyance of the replacement property to the exchangor is exempt because it involves no genuine consideration.

Q: Why doesn't the EAT's transfer of the replacement property count as a taxable sale?
A: Because the EAT is, in substance, acting purely as the exchangor's agent or nominee — it fronts none of its own money, keeps none of the property's upside or downside, and is economically neutral throughout, per Tax Law § 1405(b)(4)'s exemption for conveyances without consideration.

Q: Is this exemption automatic for any company calling itself an EAT?
A: No — the Department's conclusion was based on this EAT's specific, IRS-safe-harbor-compliant structure (no EAT funds at risk, matching lease/loan terms, fee-only compensation). An arrangement that doesn't mirror those facts could be analyzed differently.

Citations and references

Statutes and guidance:

• Tax Law § 1402(a)
• Tax Law § 1401(e)
• Tax Law § 1401(f)
• Tax Law § 1405(b)(4)
• Tax Law §1401(d)
• 26 U.S.C. § 1031
• 26 CFR § 1.1031(k)-1
• Rev. Proc. 2000-37
• Rev. Proc. 2004-51

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_2016.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a16_2r.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-16(2)R
Miscellaneous Tax
December 7, 2016

Office of Counsel
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M150511A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTEDREDACTEDR Petitioner asks whether a
conveyance of real property from an “exchange accommodation titleholder” (“EAT”) to a
taxpayer as part of a “reverse” like-kind exchange under 26 U.S.C. (“IRC”) § 1031 is subject to
real estate transfer tax (RETT) under Tax Law § 1402. In this Advisory Opinion, the Petitioner
is an EAT. The taxpayer is referred to as the “exchangor.”
We conclude that the conveyance of real property from an EAT to the exchangor as part
of a “reverse” like-kind exchange under the facts below is not subject to RETT.
Background and Facts
IRC § 1031 permits an exchanger to defer current recognition of gain on the sale of
property ("relinquished property") for federal income tax purposes to the extent that the
exchangor exchanges such property for other property of a "like-kind" ("replacement property").
Both the relinquished property and the replacement property covered by this section must be held
for productive use in a trade or business or for investment. Under IRC § 1031(a)(3), an
exchangor that sells relinquished property must identify replacement property within 45 days
from the disposition of the relinquished property and acquire the replacement property within
180 days from the disposition of the relinquished property. The regulations codified at 26 CFR
§ 1.1031(k)-1 (the "Regulations") provide guidance and safe harbors for deferred exchanges.
Among other things, the Regulations allow for the use of a "qualified intermediary" ("QI"), an
independent third party who facilitates the deferred like-kind exchange.
The federal statutes and regulations do not address a "reverse" like-kind exchange
("reverse exchange"), wherein an exchangor acquires replacement property prior to the sale of
the relinquished property. In 2000 and 2004, the Internal Revenue Service ("IRS") promulgated
Revenue Procedures 2000-37 and 2004-51 (collectively, the "Rev. Procs."), which set forth the
criteria for a reverse exchange to qualify for the deferred gain without disturbing the deferred
exchange safe harbors in the Regulations. The Rev. Procs. provide for the use of an "exchange
accommodation titleholder" ("EAT"), a person or entity independent from the exchangor, to
facilitate a reverse exchange by arranging for the acquisition of the replacement property before
the exchangor disposes of the relinquished property. Petitioner is in the business of acting as an
EAT. Petitioner's affiliate is in the business of acting as a QI.

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The Rev. Procs. provide a safe harbor that allows an exchangor to treat the EAT as the
owner of the property for federal income tax purposes, thereby enabling such exchangor to
accomplish a qualifying reverse like-kind exchange. 1
Under the Rev. Procs. safe harbor, the IRS will not challenge (a) the qualification of
property as either "replacement property" or "relinquished property" for purposes of IRC § 1031
and the regulations thereunder, or (b) the treatment of an EAT as the beneficial owner of
property for federal income tax purposes, if the property is held pursuant to a qualified exchange
accommodation arrangement ("QEAA"). 2 Property is considered to be held in a QEAA if the
requirements in Rev. Proc. 2000-37 § 4.02 are met. The requirements are:
(1) Qualified indicia of ownership of the property is held by an EAT who is subject to
federal income tax. Such qualified indicia of ownership must be held by the EAT at all times
from the date of acquisition by the EAT until the property is transferred. "Qualified indicia of
ownership" means legal title to the property, other indicia of ownership of the property that are
treated as beneficial ownership of the property under applicable principles of commercial law
(e.g., a contract for deed), or interests in an entity that is disregarded as an entity separate from
its owner for federal income tax purposes (e.g., a single member limited liability company) and
that holds either legal title to the property or such other indicia of ownership;
(2) At the time the qualified indicia of ownership of the replacement or relinquished
property is transferred to the EAT, it is the exchangor's bona fide intent that the property held by
the EAT represents either replacement property or relinquished property in an exchange that is
intended to qualify for nonrecognition of gain or loss under IRC § 1031;
(3) No later than five business days after the transfer of qualified indicia of ownership of
the property to the EAT, the exchangor and the EAT must enter into a qualified exchange
accommodation agreement (an "accommodation agreement") specifying that the EAT is holding
the property for the benefit of the exchangor in order to facilitate the § 1031 exchange and that
the EAT will be treated as the beneficial owner of the property for all federal income tax
purposes. Both parties must report the federal income tax attributes of the property on the
federal income tax returns, consistent with the accommodation agreement;
(4) No later than 45 days after the transfer of qualified indicia of ownership of the
replacement property to the EAT, the relinquished property must be properly identified;
(5) No later than 180 days after the transfer of qualified indicia of ownership of the
property to the EAT, (a) the replacement property (directly or through a QI) is transferred to the
exchangor, or (b) the relinquished property is transferred to a person who is not the exchangor;
and

1
2

Rev. Proc. 2000-37 § 2.06 and Rev. Proc. 2000-37 § 1.
Rev. Proc. 2000-37 § 1.

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(6) The combined time period that the relinquished property and the replacement
property are held in a QEAA does not exceed 180 days.
In a typical accommodation agreement used by the Petitioner, the parties agree that the
EAT is acting solely as the exchangor's agent for all purposes except for federal income tax and,
as appropriate, state income tax purposes, when the EAT purchases the replacement property and
when the EAT conveys the property to the exchangor. During the interim (called "the Parking
Period"), the exchangor is solely responsible for all activities, actions, and decisions relating to
the management, repair, construction of improvements, insurance, collection of rents and the
payment of taxes, mortgage payments, etc. The exchangor indemnifies and holds harmless the
EAT and its related entities from all losses, liabilities, fees, expenses, and damages related to the
EAT's obligations under the QEAA.
The following are the steps taken in a typical reverse exchange.
A. The Replacement Property: (1) The exchangor and the EAT first enter into an
accommodation agreement to effectuate a reverse exchange, pursuant to which the EAT is acting
as exchangor’s agent for all purposes except for federal income tax and, as appropriate, state
income tax purposes. (2) The exchangor contracts to buy the replacement property and assigns
its rights under the contract to the EAT. (3) The EAT then closes on the property and acquires
the legal title directly or through a disregarded entity such as a single member limited liability
company.
The exchangor provides the EAT with all funds needed to acquire the property (the
"Loan"). The EAT is not required to advance or expend any of its own funds. Under the
accommodation agreement, the EAT will receive a fee, be reimbursed for all its costs incurred
with respect to ownership of the replacement property and transfer the replacement property to
the exchangor at no gain or loss. Consistent with the principle that the EAT is merely acting as
an agent for the exchangor, the EAT's only financial reward (or risk) under the accommodation
agreement is its fee. The EAT does not share in the up- or down-side of fluctuations of the value
of the replacement property, or share in its revenues or suffer its costs. In order to keep the EAT
economically neutral with respect to the replacement property during the Parking Period, the
EAT, as fee owner, will execute a master triple-net lease of the property to the exchangor as
master lessee (the "Lease Agreement"). The income and expenses reported by the EAT during
the Parking Period are designed to be a wash. Under the Lease Agreement, the amount of the
rent due from the exchangor is set equal to the outstanding monthly interest obligation of the
EAT under the Loan. Therefore, for federal income tax purposes, the EAT would report rental
income and claim a matching deduction for interest paid to the exchangor under the Loan. (4)
Real estate transfer taxes are paid on the conveyance of the replacement property to the EAT.
B. The Relinquished Property: (1) The exchangor enters into a purchase and sale
contract for the relinquished property with a purchaser. (2) Pursuant to an "exchange
agreement," the exchangor assigns its rights (but not its obligations) in the purchase and sale
contract for the relinquished property to the QI. The QI's rights in the purchase and sale contract
for the relinquished property are subject to the right of the purchaser to acquire the relinquished

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property. (3) At the QI's direction, the exchangor transfers the relinquished property directly to
the purchaser. (4) Real estate transfer taxes are paid on the conveyance of the relinquished
property to the purchaser. (5) The QI places the proceeds of the sale in a trust account for the
benefit of the exchanger (referenced below as “the trust account”).
C. The Exchange: Through the QI, the exchangor has effectuated selling the
relinquished property to the purchaser (as described in paragraph B above). Next, the EAT will
purchase the replacement property with funds supplied by the exchangor as one or more
nonrecourse loans. The loans will consist of funds advanced by the exchangor, including loans
provided by one or more third-party lenders arranged by the exchangor and secured by the
replacement property. The EAT will not be expected to pay any costs directly unless the
exchangor has provided the funds to the EAT in advance. The exchangor assigns its rights for
the replacement property under the QEAA to the QI. Alternatively, the exchanger contracts to
purchase from the EAT (i) the replacement property or (ii) the ownership interest in the
disregarded entity of the EAT that holds the title to the replacement property. Then, the
exchangor assigns its rights to acquire the replacement property under such contract to the QI.
Under either scenario, QI buys the replacement property from the EAT with the funds from the
trust account and the EAT transfers the replacement property directly to the exchangor. The
EAT repays the exchangor any portion of the loans not funded by third-party lenders, and any
mortgage is either extinguished or transferred along with the replacement property. As a federal
income tax matter, the exchangor is considered to have exchanged the relinquished property for
the replacement property, although the EAT acquired the replacement property on the
exchangor's behalf prior to the sale of the relinquished property.
Analysis
Tax Law § 1402(a) imposes the RETT on each conveyance of real property or interest
therein when the consideration exceeds five hundred dollars. Tax Law § 1401(e) defines
"conveyance" as "the transfer or transfers of any interest in real property by any method . . . .”
Tax Law § 1401(f) provides, in part, that an “interest in real property” includes a contract to
purchase real property, a beneficial interest, and the right to receive rents, profits or other income
derived from real property. However, Tax Law § 1405(b)(4) provides that the RETT does not
apply to conveyances of real property without consideration and otherwise than in connection
with a sale, including conveyances of realty as a bona fide gifts. Tax Law §1401(d) provides
that consideration means the price actually paid or required to be paid for the real property or
interest therein, including payment for an option or contract to purchase real property, including
discharge of an indebtedness or obligation and the amount of any mortgage or lien.
In a reverse like-kind exchange, there are only two conveyances for consideration: (1)
the sale of the replacement property to the EAT that obtains legal title directly or acquires the
title indirectly through its ownership of its disregarded entity, and (2) the transfer of the
relinquished property from the QI to the purchaser. The sole purpose of the intermediate
conveyances to the EAT and the QI is to conform the timing of the transfer of the relinquished
property to a buyer, and the acquisition of the replacement property by the exchangor, to the

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structure required for a like-kind exchange under IRC § 1031. Under the QEAA, the EAT is in
substance the agent or nominee of the exchangor. The QEAA provides that all the property held
by the EAT is being held for the benefit of the exchangor in order to facilitate the like-kind
exchange and that the parties agree that the EAT is acting solely as the exchangor’s agent for all
purposes except for federal, and as appropriate, state income taxes. The EAT does not use any
of its own funds to pay for the acquisitions of the properties, nor does it hold any responsibilities
with regard to maintenance of the property. The EAT is paid only its fees for services and,
except for the limited responsibilities to pay income taxes on those fees, it is held harmless in all
other respects. If, after acquisition of the replacement property, the EAT leases the property to
the exchangor prior to the conclusion of the exchange, the exchangor’s rent paid to the EAT
would equal any payment made by the EAT on a mortgage that secures a loan for the purchase
price. Thus, the EAT remains economically neutral under the terms of the QEAA. The EAT
does not report gain or loss from the purchase or sale of the properties. Because the EAT is
serving as the agent or nominee for the exchangor, no consideration is provided for the
conveyance from the EAT to the exchangor. As such, we conclude that this conveyance is
exempt from RETT under § 1405(b)(4).

DATED: December 7, 2016

/s/
DEBORAH R. LIEBMAN
Deputy Counsel

NOTE:

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.