What Is the Significance of the Code ‘200

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Investing in real estate can get technical, with all the processes, regulations, and jargon that require in-depth knowledge to understand. One piece of information you might encounter is Code 200-37. This is the shorthand for Revenue Procedure 2000-37, which is the framework used for reverse exchanges.

Having an understanding of Code 200-37 why it matters, can help you better navigate more complex exchanges and maintain compliance with the IRS rules, ensuring tax-deferral for capital gains taxes. Keep reading to learn more.

Definition of Code 200-37

When dealing with tax-related processes, you’ll encounter lots of numbers like 8824 or 1040. However, 200-37 is not a tax form or a statute of the revenue code (under which Section 1031 belongs). Instead, 200-37 refers to Revenue Procedure 2000-37, which was issued in 2000. This revenue procedure established the safe harbor rules for reverse exchanges, providing investors with the guidelines for compliance.

In the past, reverse exchanges didn’t operate under any formal guidance. Investors were able to acquire the replacement property before selling the relinquished asset, but there was a risk that the transaction may not be recognized by the IRS. Revenue Procedure 2000-37 addressed this problem by creating a safe harbor structure that’s respected by the IRS.

Significance of Revenue Procedure 2000-37 for 1031 Exchanges

The traditional real estate exchange involves selling the replacement property first before acquiring the replacement asset. The inverse is the reverse exchange, but this practice raises ownership and timing concerns based on traditional rules.

When 200-37 was finally introduced, it defined a framework that provided reverse exchanges’ legitimacy. The revenue created the concept of a qualified exchange accommodation arrangement (QEAA), wherein an exchange accommodation titleholder (EAT) temporarily held legal title to either of the involved properties. This parking arrangement 1031 Exchange process prevented an investor from holding title to both properties at the same time, maintaining IRS compliance.

200-37 Safe Harbor 1031 Exchange: Rules To Know

How does 200-37 allow reverse exchanges to remain compliant with 1031 Exchange rules? Here’s the specific safe harbor language.

EAT: The transaction must involve the use of an EAT, which is an independent entity. It will be the party that holds the title during the exchange period.

180-Day Holding Period: The EAT can only hold the parked property for 180 days. You must be able to close the sale of your relinquished property within this timeframe.

45-Day Identification: Within 45 days of the EAT acquiring the title, investors must identify three prospective relinquished properties.

Written QEAA: The arrangement between the taxpayer and the EAT must be documented in writing, clearly stating that the property is being held to facilitate a 1031 Exchange.

All other rules that apply in traditional exchanges also apply to reverse exchanges. These include the use of a qualified intermediary (QI), reinvestment of all proceeds, and reporting requirements.

Interactions of 200-37 and Section 1031

Revenue Procedure 2000-37 doesn’t eliminate the guidelines provided by Section 1031. Rather, Code 200-37 works alongside the like-kind exchange framework. While Section 1031 establishes the basic principles that allow tax deferral, it doesn’t have the language for reverse exchanges. Code 200-37 bridges that gap by explaining how taxpayers can comply with Section 1031 even when the transaction doesn’t follow the established order.

Keep in mind, though, that 200-37 is only a safe harbor with the definitive guidelines that minimize IRS scrutiny. If a reverse exchange isn’t applicable for the transaction, there are other methods you can try. However, these other avenues don’t have the language and structure that shield them from IRS scrutiny. As such, most QIs and tax advisors strongly recommend following reverse 1031 Exchange rules under the 200-37 framework.

Practical Tips on Following IRS 200-37 Guidelines

While Code 200-37 provides the guidelines for an IRS-compliant reverse exchange, the transaction remains complex. Any small deviation from these standards could result in IRS audits that might disqualify you from tax-deferral benefits.

The best practice for reverse exchangers is to work with experts who can handle the complexity of the transaction. They can provide guidance and oversee the steps you take to ensure that you’re following the established safe harbors. Plus, the involvement of QIs and EATs helps you maintain legal separation and execute meticulous documentation that shields your investment from unnecessary tax liability.

Wrapping Up: What To Know About Code 200-37

For reverse exchanges, Code 200-37 provides the structure that makes such transactions legitimate in the eyes of the IRS. By complying with this framework, you can conduct a non-traditional exchange that still complies with Section 1031 principles. Always make sure to consult with tax experts to gain guidance for such exchanges.