Thomas C. Roberge & Company

SECTION 1031 EXCHANGES AND

NOTICES OF NONRECOGNITION

FOR FOREIGN SELLERS

January 17, 2006

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

We have received several inquiries recently as to whether a Notice of Nonrecognition can be used to avoid the 10% FIRPTA withholding in Section 1031 transactions involving a foreign seller. Many of these inquiries are citing IRS literature that states in part “ When a transferor exchanges a U.S. real property interest, and the exchange qualifies for nonrecognition treatment under the Internal Revenue Code (IRC), the transferor must draft a notice of nonrecognition in accordance with Section 1445 ……”.

This IRS literature does not elaborate on the phrase “in accordance with Section 1445”. The FIRPTA withholding regulations specifically address notices of nonrecognition and their applicability to Section 1031 exchanges.

These regulations state that a notice of nonrecognition can only be used for a simultaneous Section 1031 exchange that qualifies in its entirety for the tax deferral benefits of Section 1031. If a simultaneous Section 1031 exchange is in any way partially taxable (for example, where “boot” is involved), it is not eligible for a notice of nonrecognition. Also, a delayed (“Starker”) exchange is not eligible for a notice of nonrecognition.

The bottom line is the 10% FIRPTA withholding is applicable and a notice of nonrecognition cannot be used in Section 1031 transactions involving foreign sellers unless the exchange is simultaneous and the transaction qualifies for 1031 benefits in its entirety.

Notices of nonrecognition are fraught with danger to the buyer if they are not properly drafted and if the appropriate attachments are not included. The 10% withholding will be applicable in most “1031” transactions unless the foreign seller applies for relief (a withholding certificate) or other exceptions apply.

Section 1031 transactions are a viable planning technique for foreign sellers for deferring their U.S. tax liability. However, the country of tax residence may have an impact on the practicality of this technique. Our firm has been involved in numerous “1031” transactions involving foreign sellers. Please call us for information if you have questions.

Internal Revenue Service Circular 230 Disclosure – You are hereby advised that any tax advice contained in this newsletter is not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or to support the marketing of any tax transactions or matters addressed herein.