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The Reverse Exchange A reverse exchange is the purchase of the replacement property prior to closing on the relinquished property. An investor may need to consider a reverse exchange in a seller's market, where properties are selling quickly and inventory is scarce. The most common variation (often called "parking the replacement property") involves the Qualified Intermediary first purchasing the replacement property. When the relinquished property is sold at a later date, the Qualified Intermediary completes the exchange by deeding the replacement property back to the Exchanger. It is especially crucial that the Qualified Intermediary has in-depth knowledge of the steps and precautions necessary in these complex transactions. Working with an investor's tax advisors and attorneys, API draws upon substantial experience with reverse exchanges to help lead the investor safely through a minefield of potential hazards.
The “Reverse” Exchange allows an investor to acquire real estate now, when an excellent investment may be available, and to sell his or her property later, when a better price might be obtained. The future sale would be tax deferred. This procedure greatly expands the ability of the investor to take advantage of changes in the marketplace and to improve his or her investment position. The use of a Reverse Exchange has been limited in the past due to a misunderstanding of what it really is. The Reverse Exchange finally received federal guidelines September 15, 2000.
The Basics
There are two methods for completing a Reverse Exchange:
Once the Facilitator acquires the desired property, he immediately trades it to the Exchangor. The Exchangor trades his or her property to the Facilitator in exchange. The Exchangor now owns the property he or she desires and has simultaneously traded his or her property away. The Facilitator keeps the Exchangor’s former property until a buyer is found. The Facilitator then sells the Exchangor’s former property to complete the transaction.
After the Facilitator acquires the desired property, he retains ownership until the Exchangor has found a buyer for his relinquished property. Just before the sale, the Facilitator trades the desired property for the property owned by the Exchangor and completes the sale.
When a Reverse Exchange is being contemplated, the investor must determine how the acquisition will be financed. The down payment must be available to the Facilitator for purchase of the property. The down payment is normally borrowed by the Facilitator and repaid when the Exchangor’s property is later sold by the Facilitator. The Exchangor must decide which of the properties he wishes to have ownership of through the exchange period. The Exchangor may choose to have title to either the relinquished or replacement properties. Financial requirements commonly dictate the appropriate course of action.
Use It!
The new Reverse Exchange guidelines have justified a procedure used for years. The following are a few of the basic requirements:
At the time the property is transferred to the exchange accommodation titleholder (EAT), it is the taxpayers intent that the property held by the EAT represents either the replacement and/or relinquished property.
No later than five business days after the transfer of the property to the EAT, there must be a written qualified exchange accommodation agreement.
No later than 45 days after the transfer of the replacement exchange property to the EAT, identification of the relinquished property or properties is required. The identification must be consistent with the existing delayed rules.
The combined time period that the relinquished and replacement properties are held in the qualified exchange accommodation agreement is not to exceed 180 days.
Summing It Up
The new guidelines provide safe harbors to work within. We now have a procedure that is allowed and guidelines to work within. The above guidelines are the basics. Please contact your exchange professional for the details regarding this new tool.
Consult Tax and Legal Counsel
Equity Advantage will gladly evaluate your objectives to give you the appropriate options. Any exchange should be well planned, Reverse Exchanges demand it. Competent tax and legal counsel is critical to the success of this exchange technique.
C. The Reverse Exchange
"The Internal Revenue Service has recently issued Revenue Procedure 2000-37, which allows an exchanger to complete a Reverse Exchange. A Reverse Exchange allows the exchanger to acquire property before the exchanger has sold the property that he would like to relinquish in the Exchange. This gives the Exchanger the possibility of making sure that the up-leg property definitely fits his requirements before selling his old property. The entire text of Revenue Procedure 2000-37 follows."
When using the delayed exchange method, it is necessary to engage the services of a competent and reliable exchange intermediary. The intermediary will hold the proceeds of the relinquished property in trust for the exchanger and upon the instruction of the exchanger, acquire one or more of the named properties and assist in the closing of the replacement property. We prefer to use an intermediary who offers a Letter of Credit backed up by the assets of a financial institution to guarantee the safety of the funds held during the course of the exchange. Please refer to the following article, Simplifying Exchanges Through The Use of An Intermediary, by Robert F. Egenolf, J.D., LL.M. Mr. Egenolf is an attorney who specializes in IRC 1031 Tax Deferred Exchanges. He has lectured and written extensively about this topic. He is also the President of Amherst Exchange Corporation, an intermediary for tax deferred exchanges.
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