Reverse exchanges can be uniquely effective, provided you understand the myriad details which are required to make your reverse exchange IRS compliant.

Co-Founder & CEO

Dean Senner

When a real estate investor and 1031 Exchanger is actively seeking a replacement property in a very competitive market, getting a property under contract and being able to successfully identify it for the exchange can be exceedingly difficult.

In fact, having the forty-five day identification gun at your head with the result of failure meaning the need to write a large check to the IRS has served as an impetus for many Exchangers to entirely opt out of the problems associated with identification by utilizing a Reverse Exchange. This approach, as set forth in Revenue Procedure 2000-37 enables them to buy before they sell, but still defer all their capital gain because their exchange remains compliant with IRC Section 1031.

The Reverse Concept -

The underlying driver for all Reverse Exchanges is the IRS restriction that you cannot 1031 exchange into a property you already own. This means that simply buying your replacement property first, subsequently selling your relinquished property and calling it a tax deferred exchange will simply not work.

This is why the concept of warehousing or parking title the to a property was approved in Revenue Procedure 2000-37. Essentially allowing the creation of an entity, to serve in the stead of the Exchanger, for the temporary holding of title to one of the properties so the Exchanger is never positioned to be exchanging into property they already own.

In most cases, the warehousing or parking of title is accomplished with the Qualified Intermediary creating a Limited Liability Company known as an 'Exchange Accommodation Titleholder'. The EAT takes title to one of the exchange properties for the exchange period while the remaining sale and purchase logistics are completed within the statute 180 day exchange period. In a vast majority of cases the EAT takes title to the replacement property, although there are situations where the relinquished property title will be parked due to transactional or existing loan logistics. This warehousing of the replacement property title is usually done with the aid of a loan from the Exchanger or through financing to the EAT which is guaranteed by the Exchanger.