A Reverse Exchange allows an investor to acquire a new property today and to sell the old property later. The Reverse Exchange greatly expands the ability of the investor to take advantage of changes in the marketplace and to improve his or her investment position. Although the Reverse Exchange has been used for decades, the Internal Revenue Service did not issue any guidelines until 2000 when they published Revenue Procedure 2000-37.
For a Reverse Exchange to be considered, it is necessary for the Exchangor to have the financial ability to purchase the target property while not yet having the proceeds from the future sale. The required down payment will be lent to the Exchange Accommodation Titleholder (EAT). This loan is typically repaid upon the sale of the Exchangor’s relinquished property.
Reverse Exchange Basics
There are two primary strategies for completing a Reverse Exchange:
1) Warehouse Replacement Property
In the Warehouse Replacement approach, Equity Advantage will create a new single member, single asset LLC that Equity Advantage is the sole member of. The new LLC is commonly called an EAT (Exchange Accommodation Titleholder) and the EAT borrows the down payment from the Exchangor and acquires title to the replacement property. The EAT retains ownership of the replacement property until a buyer is found for the relinquished property. When the relinquished property is sold the proceeds from the sale go to Equity Advantage just as they would in a delayed exchange. The sale proceeds are then used to payoff the initial loan between the Exchangor and the EAT. Finally, Equity Advantage’s ownership of the replacement property is transferred to the Exchangor completing the exchange.
2) Warehouse Relinquished Property
Equity Advantage creates the EAT to hold title of the relinquished property. When the replacement property is acquired it is simultaneously swapped with the Exchangor’s relinquished property. The Exchangor now holds title to the replacement property and the EAT holds title to the relinquished property. The relinquished property is owned by the EAT until a buyer is found. At the time of closing, title of the relinquished property will be transferred from the EAT to the buyer and the sale proceeds will go to Equity Advantage as they would in a delayed exchange. The sale proceeds are then used to payoff the initial loan between the Exchangor and the EAT, completing the exchange.
Reverse Exchange Requirements
- At the time the property is transferred to the exchange accommodation titleholder (EAT), it is the taxpayer’s 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 Exchange 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.
Watch Our Video on Reverse Exchanges
Want More Information on the Reverse Exchange?
Watch the Replay of Our Webinar: The Reverse 1031 Exchange Bootcamp!
This 1-Hour Webinar covers:
- 1031 Exchange Basics
- Practical Considerations for the Reverse
- How to structure a Reverse Exchange; “Warehouse Relinquished” or “Warehouse Replacement”
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Can’t make it? You should still register! Anyone who signs up will receive a copy of the slides and a link to view the session again. For more information head online now to 1031exchange.com, or give us a call at 1-800-635-1031.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.