The Reverse Exchange
A reverse exchange is the “flip side” of a deferred (delayed) exchange. In a reverse exchange the Exchanger for various reasons must acquire their like-kind replacement property before disposing of a relinquished property. Until recently it was unclear whether reverse exchanges would be given nonrecognition treatment by the IRS. However, that question was answered by the IRS in the form of Revenue Procedure 2000-37 (“Rev. Proc. 2000-37”). This Revenue Procedure provides that tax deferral on reverse exchanges will be recognized if the transactions fall within the scope of an announced IRC §1031 “safe harbor.” The new reverse exchange rules can be expected to lead to two categories of reverse exchanges, those that fit neatly within the safe harbor guidelines and those that do not fit within the safe harbor rules.

The “Safe HarBor” Reverse Exchange

In a reverse exchange structured under the safe harbor protection of Rev. Proc. 2000-37 the entity used to facilitate a reverse exchange is referred to as the Exchange Accommodation Titleholder (“EAT”), and the property held by the EAT is commonly called the “parked property”. The EAT will usually form a special purpose entity (the “Holding Entity”) to take title to the parked property. To complete a reverse exchange the Holding Entity can take title to either the relinquished property or the replacement property under a “Qualified Exchange Accommodation Arrangement”. The document between the Exchanger, EAT and the Holding Entity is termed the “Qualified Exchange Accommodation Agreement” (“QEAA”).

Under Rev. Proc. 2000-37, a safe harbor reverse exchange must be completed within 180 days after the Holding Entity acquires the parked property. Additionally, under a safe harbor reverse exchange the Exchanger must identify one or more relinquished properties within 45 days after the Holding Entity acquires the replacement property. Rev. Proc. 2000-37 adopts the same identification rules that apply in delayed exchanges, which require written identification be delivered to another party to the exchange, such as the Holding Entity, EAT or the Qualified Intermediary, and limits the number of alternative and multiple properties that can be identified.