Qualified Exchange Accommodation Arrangements

Posted on by user

Qualified Exchange Accommodation Arrangements (QEAA)

A qualified exchange accommodation arrangement (QEAA) is a tax strategy used in conjunction with Section 1031 of the Internal Revenue Code to defer capital gains tax on the sale of real estate. In a QEAA, a third party—known as an exchange accommodation titleholder (EAT) or accommodation party—temporarily holds either the relinquished property or the replacement property while the other half of the 1031 exchange is completed. These arrangements are also called warehouse transactions.

Key takeaways

  • A 1031 exchange lets investors defer capital gains tax when they swap real estate held for investment or productive use in a trade or business for like-kind real estate.
  • A QEAA uses an intermediary (the EAT) to hold one property temporarily to allow timing flexibility in completing the exchange.
  • Like-kind exchanges are now limited to U.S. real property (post-TCJA, 2018); other personal or intangible property no longer qualifies.
  • All 1031 exchanges must be reported on Form 8824; receiving non–like-kind property or cash (boot) can trigger taxable gain.

How a QEAA works

  1. The investor identifies a replacement property (or has a replacement identified) but cannot complete the direct transfer within the required timeline.
  2. An intermediary acts as the EAT and takes title to either the relinquished or replacement property.
  3. The EAT holds the property temporarily until the other property is transferred, at which point the parties complete the like-kind exchange.
  4. For tax purposes, transfers involving the EAT can be treated as if the investor relinquished or received the property in the exchange.

The QEAA provides timing flexibility while preserving the tax-deferred treatment under Section 1031, provided all other exchange rules are met.

Eligible property and like-kind rules

  • Since the Tax Cuts and Jobs Act (2017), 1031 exchanges are limited to real property only.
  • Qualified exchanges require real estate held for investment or for productive use in a trade or business, and the properties must be U.S. real property.
  • “Like-kind” refers to the nature or character of the property, not its grade or quality. For example, one apartment building for another is typically like-kind; improved and unimproved real estate are generally considered like-kind.

Tax reporting and taxable events

  • Report 1031 exchanges on Form 8824, Like-Kind Exchanges. This form calculates the amount of gain deferred.
  • “Boot” is cash, liabilities relieved, or non–like-kind property received in the exchange. Receipt of boot triggers recognition of gain to the extent of the boot; losses generally cannot be recognized in a 1031 exchange.
  • Gain recognized because of boot is reported on the applicable tax forms (e.g., Form 8949 and Schedule D of Form 1040, or Form 4797). If depreciation is recaptured, the recognized gain may be taxed as ordinary income.
  • Even when an EAT holds title in a QEAA, the transaction can still qualify as a like-kind exchange if structured and reported correctly.

Exchange Accommodation Titleholder (EAT)

  • The EAT becomes the beneficial owner of the property it holds in the QEAA.
  • The IRS treats transfers involving an EAT as transfers in an exchange for purposes of Section 1031 when the arrangement satisfies the applicable requirements.
  • QEAAs were formally recognized by the IRS in 2000, providing clearer guidance for these intermediary-held transactions.

Practical considerations and limitations

  • Time limits and identification rules for 1031 exchanges still apply; QEAAs provide flexibility but do not remove statutory deadlines.
  • Because QEAA rules and their application can be complex, and because tax consequences (including boot and depreciation recapture) can be significant, consult a qualified tax professional or 1031 exchange specialist before proceeding.
  • Ensure any intermediary used is reputable and that the arrangement is documented to meet IRS standards.

Conclusion

A QEAA is a useful mechanism to preserve 1031 tax-deferred treatment when timing or logistics prevent a direct exchange. It relies on a qualified intermediary (the EAT) to hold property temporarily, but investors must still comply with 1031 rules, proper reporting, and limitations on eligible property. Professional advice is recommended to structure and report a QEAA correctly.