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
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.
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?
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.
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.