Reverse Exchanges

Reverse Exchanges

A reverse exchange results when the replacement property is acquired prior to the sale of the relinquished property. The IRS formally acknowledged reverse exchanges effective September 15, 2000. With the help of a QI, the exchanger utilizes an Exchange Accommodation Titleholders (“EAT”) to purchase either the relinquished or replacement property. As with delayed exchanges, the reverse exchange must be completed within 180 days.

TWO DIFFERENT PARKING METHODS FOR REVERSE EXCHANGES:

Exchange Last a/k/a “Park Title” to the Replacement Property: In this parking arrangement, the EAT acquires title to the replacement property with funds loaned by the exchanger. The EAT holds the parked property until the exchanger finds a buyer for the relinquished property. After a buyer is found, the QI sells the relinquished property to the buyer and uses the exchange proceeds to purchase the replacement property from the EAT. The EAT uses the sale proceeds to repay the loan from the exchanger. Thus, the exchange occurs at the end of the transaction.

Exchange First a/k/a “Park Title” to the Relinquished Property: In this parking arrangement, the QI sells the relinquished property to the EAT. The EAT then purchases the relinquished property with the funds loaned from the exchanger. Concurrent therewith, the QI uses the proceeds to acquire the replacement property and causes the seller to convey title directly to the exchanger. Thus, the exchange occurs at the beginning of the transaction. Thereafter, the EAT continues to hold title to the relinquished property until the exchanger finds a buyer. After a buyer is found, the EAT sells the relinquished property to the buyer and uses the proceeds to repay its loan from the exchanger.

In either scenario, the EAT will enter into a lease agreement with the exchanger under which the exchanger will have management responsibilities over the property for the duration of the parking period.

The EAT and the exchanger must enter into a written Qualified Exchange Accommodation Agreement (“QEAA”). If the replacement property is parked, the exchanger has 45 days to identify one or more relinquished properties and the exchange must be completed within 180 days (i.e. relinquished property must be conveyed to third-party buyer and replacement property must be conveyed to the exchanger), after the EAT acquires title to the replacement property.