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Reverse Exchanges

In the current market with very limited inventories

Exchangers are worried they won't be able to find

suitable replacement property within the 45-day

identification window.

Solution ... acquire the replacement property first.

Locking in a replacement property is crucial to the success of a 1031 taxdeferred

exchange. When you know you can sell your property fast, a

reverse exchange may be the answer. While the IRS permits reverse

exchanges it will not allow the Exchanger to own both properties at the

same time. One of the properties must, for federal tax purposes, be parked

with an Exchange Accommodation Titleholder (EAT), a service provided by

most exchange companies.

Guidance

Revenue Procedure 2000-37 provides safe harbor guidance for structuring

reverse exchanges. The guidance permits the Exchanger to fully manage

and control the parked property. The Exchanger can loan funds to the EAT

and guarantee any loan obligations of the EAT. The EAT can only hold the

property 180 days.

Structuring a Reverse Exchange

The EAT can park either the relinquished property or the replacement

property. Practical matters will often dictate which is parked. Does the

Exchanger have sufficient funds to acquire the new property while their

equity is tied up in the old property? Will the lender permit the EAT to be the

borrower on the replacement property loan? (The EAT will form a limited

liability company (LLC) for this purpose and LLC's are non-conforming

borrowers for 1 - 4 unit residential rentals.) Are there any environmental

concerns regarding the relinquished or replacement property? An EAT will

be reticent to hold a property with these issues. Are there uncooperative coowners

on either property?

Costs

There may be extra closing costs with the reverse exchange The

There may be extra closing costs with the reverse exchange. The

Exchanger will incur additional fees with their tax advisor. Liability insurance

premiums may be higher. A lender might have additional fees if the EAT is

going to be the initial borrower. The EAT will have additional fees. When all

these expenses are tallied they can add up to $10k or more. A reverse

exchange makes financial sense when the Exchanger has significant gains

(> $100k?) to shelter with the exchange.

Alternatives

Beg/borrow/steal an extension from the seller of the replacement

property. More earnest money? Non-refundable earnest money?

Obtain an option for the replacement property.

Kelci Paiva