What is a reverse exchange?
A reverse exchange occurs when an investor wants to acquire replacement property prior to the closing of the relinquished property. Although common terminology calls this type of transaction a “reverse exchange,” the investor (also referred to as the “Exchangor”) does not actually acquire the replacement property first and dispose of the relinquished property later. Instead, the Exchangor arranges for an Exchange Accommodation Titleholder (or “EAT”) to take title to either the relinquished property or the replacement property.
A reverse exchange, sometimes called a “parking arrangement,” occurs when a taxpayer acquires a Replacement Property before disposing of their Relinquished Property. A “pure” reverse exchange, where the taxpayer owns both the Relinquished and Replacement properties at the same time, is not allowed. The actual acquisition of the “parked” property is done by an Exchange Accommodation Titleholder (EAT) or parking entity.
When considering the sale and replacement of commercial or investment property, it might be wise to look into a reverse exchange. This method of property exchange, also known as a 1031 reverse exchange or as a reverse 1031 exchange, is a result of Revenue Procedure 2000-37, a federal tax statute enacted in the U.S. in September of 2000. A 1031 exchange is a “safe harbor” established by the IRS to allow for circumstances that would permit taxpayers to take advantage of a financially attractive and potentially profitable opportunity to purchase new and sell old investment or commercial property. A 1031 exchange covers a number of property transactions besides reverse exchanges. Real estate, by far the most commonly exchanged commodity, may include office buildings, warehouses, apartment buildings, etc. Undeveloped land may also be included in a 1031 reverse exchange as long as the lot is in a properly zoned area. Essentially, a 1031 reverse exchange transaction is the method whereby the
A reverse like-kind exchange is one in which the replacement property is acquired prior to the closing on the transaction in which the currently owned property is relinquished. Although the Internal Revenue Service had not provided much guidance on reverse exchanges for many years, in 2000 the Service published Rev. Proc. 2000-37. The revenue procedure provides a safe harbor which should provide greater certainty to taxpayers seeking to complete reverse exchanges.
A reverse exchange occurs when a taxpayer acquires a Replacement Property before disposing of their Relinquished Property. The IRS issued “safe harbor” guidelines for reverse exchanges on September 15th, 2000 in Revenue Procedure 2000-37. Compliance with the safe harbor guidelines creates a presumption that the transaction will qualify for ยง1031 tax-deferred exchange treatment.
