What Is a QEAA and How Does It Work in Real Estate Exchanges?

A Qualified Exchange Accommodation Arrangement (QEAA) facilitates tax-deferred real estate transactions under Section 1031 of the Internal Revenue Code. It allows investors to acquire a replacement property before selling their existing one while maintaining tax deferral. This structure helps navigate timing challenges in like-kind exchanges.

Strict IRS guidelines govern these exchanges, making it essential for investors to understand how a QEAA works to maximize tax benefits.

Requirements for Creating This Arrangement

A QEAA must comply with IRS rules to qualify for tax deferral. The property involved must be held for investment or business purposes, not as inventory or resale, as such classifications disqualify the exchange under Section 1031.

A written agreement must be executed within five business days of transferring the replacement property to an intermediary. This document must confirm the investor’s intent to complete a tax-deferred exchange within 180 days, as required by IRS safe harbor provisions.

The investor cannot have direct control over the replacement property while it is held in the QEAA structure. This means they cannot collect rental income, make management decisions, or exert ownership control before the exchange is finalized. Instead, an independent party must hold the property to ensure compliance with IRS regulations.

Role of the Exchange Accommodation Titleholder

The Exchange Accommodation Titleholder (EAT) temporarily holds legal title to the replacement property, preventing the investor from taking direct ownership before the transaction is completed and preserving the tax-deferred status.

The EAT must be an independent third party with no affiliation to the investor beyond its role in the exchange. It typically operates through a qualified intermediary or a specialized 1031 exchange entity. To ensure compliance, the EAT must maintain separate financial records and avoid commingling funds.

Beyond holding title, the EAT may secure financing, manage contractual obligations, and oversee property improvements. These actions must be structured to prevent the investor from having constructive receipt of the property, meaning they cannot control its use or disposition while the EAT holds title.

Documentation and Filing Steps

Executing a QEAA requires detailed documentation to meet IRS compliance standards. The process begins with a Qualified Exchange Accommodation Agreement, which defines the roles of all parties, the transaction timeline, and adherence to Section 1031 regulations.

Property transfer records must include a deed transferring legal ownership of the replacement property to the EAT. This deed must be recorded according to local real estate laws. Any financing arrangements must also be documented to demonstrate the investor does not have direct control over the property while the exchange is pending.

For tax reporting, the investor must file IRS Form 8824, Like-Kind Exchanges, with their tax return for the year of the exchange. This form details the relinquished and replacement properties, including acquisition and transfer dates, fair market values, and any recognized gains. Proper record-keeping is essential, as the IRS may request supporting documentation to verify compliance.

Safe Harbor Conditions

To comply with IRS regulations, specific safe harbor conditions must be met. Revenue Procedure 2000-37 outlines these provisions, protecting investors from unintended tax consequences in a reverse exchange.

The EAT must hold qualified indicia of ownership, meaning it must retain control over the property through a recorded deed, legal title, or another enforceable ownership interest. This ensures the investor does not receive the replacement property prematurely, which could disqualify the exchange from tax deferral.

The arrangement must also avoid creating an agency relationship between the investor and the EAT. If the IRS determines the EAT is acting as an agent rather than an independent entity, the transaction could be recharacterized, triggering immediate tax recognition. To prevent this, the EAT must maintain separate financial records and ensure contractual agreements reflect its independent role.

Timeline for Completing an Exchange

A QEAA must follow strict timing requirements to qualify for tax deferral under Section 1031. Investors must track these deadlines carefully to avoid disqualification.

The process begins when the EAT takes title to the replacement property. Within 45 days, the investor must identify the relinquished property in writing. This identification must include the property’s legal description or address and be submitted to a qualified intermediary or another party involved in the exchange. If multiple properties are identified, the investor must comply with the three-property rule, which allows up to three potential relinquished properties, or the 200% rule, which permits identification of properties whose combined value does not exceed 200% of the replacement property’s value.

The entire exchange must be completed within 180 days from when the EAT acquires the replacement property. This period includes both the identification and closing phases, meaning the investor must finalize the sale of the relinquished property and acquire full ownership of the replacement property within this window. If the investor fails to meet this deadline, the transaction will not qualify for tax deferral, and any capital gains on the sale of the relinquished property will become taxable.

Non-Compliance Consequences

Failing to comply with IRS requirements for a QEAA can result in significant tax liabilities. Investors who miss deadlines, improperly structure the arrangement, or exert impermissible control over the replacement property risk losing the tax-deferred status of their exchange.

If the IRS determines the transaction does not qualify under Section 1031, the investor must report the full amount of any realized gain on their tax return for the applicable year. Depending on the holding period of the relinquished property, these gains may be taxed at short-term capital gains rates, which align with ordinary income tax rates up to 37%, or long-term capital gains rates, which range from 0% to 20% based on taxable income. Additionally, depreciation recapture may apply, subjecting a portion of the gain to a 25% tax rate.

Non-compliance can also lead to penalties and interest on unpaid taxes. If the IRS finds willful non-compliance or misrepresentation, additional penalties may apply, including accuracy-related penalties of 20% on the underpaid tax amount. To avoid these risks, investors should work closely with tax professionals and qualified intermediaries to ensure compliance with IRS regulations.