When is a Reverse Exchange Used?

In a forward exchange you usually sell your relinquished property first, then buy your replacement property later. A reverse exchange is used if you find your new replacement property and must close on it before you can sell and close on your old property. It has more steps and legal documents than a normal forward exchange and involves more processing time and fees, but is very useful.

What is the IRS's Position on Reverse Real Estate Exchanges?

The IRS issued Revenue Procedure 2000-37 (Rev Proc) in September 2000 that gives taxpayers guidance on Reverse 1031 Exchanges. A “Safe Harbor” Reverse Exchange introduces a new entity into the reverse process-an Exchange Accommodation Titleholder (EAT). Under these guidelines we set up a new single member limited liability company (LLC) for use specifically in your reverse exchange. It then takes temporary title to one of the two properties since you can not hold title to both properties at the same time and do an exchange.

How does a Reverse Exchange Generally Work?

The new LLC takes title to, or holds the property until you are able to sell the old property.

The normal 1031 time restrictions apply so you must identify the old property you are going to sell 45 days from closing the new purchase and you must sell the old property within 180 days of closing the purchase.

The LLC may hold title to either the relinquished property (the old property) or the replacement property (the new property) but not both.

Before the reverse process begins, we will review with you the two types of reverse exchanges. Depending on your individual situation and the state in which the properties are located there may be different compelling reasons for us to prefer to temporarily take title to either the new replacement property or old relinquished property. In most cases we prefer to hold title to the replacement property you are buying as it is easier to avoid paying state transfer and excise taxes twice. In the steps below we will assume that we took title to your new property and that you continued to hold title to the old property.

What are the Steps in a Reverse Exchange?

As explained on the next pages the steps fall into these three categories:

1. Purchasing the New Property
   1. Contract Stage
   2. Financing Stage
   3. Closing Stage
2. Selling the Old Property
   1. Identify the Old Property to be Relinquished
   2. Contract Stage
   3. Closing Stage
   4. Pay Off Stage
3. Transferring Title / Funds
   1. Assuming title was held to the Replacement Property
   2. Special Documents
   3. Final Proceeds
   4. Time Frame
   5. Summary Letter

Next Steps

Since a reverse exchange can be more difficult to understand we would welcome a call so we can go over it more thoroughly with you and discuss the pros and cons to help you determine if it is right for you.