Reverse Exchanges

Because of favorable tax law changes, Reverse Exchanges have become commonplace over the last few years; they can provide great opportunities and advantages in managing your real or personal property investments.

As the name suggests, the Reverse Exchange works through the “exchange”of property; what makes it a "reverse" is that it allows you to purchase new investment property first, then sell your existing investment.

Effective September 15, 2000, the IRS issued its Revenue Procedure 2000-37. With this law, for the first time, the IRS sanctioned the Reverse Exchange with the "safe harbor" rule. Essentially, the IRS has approved a parking arrangement. If a real estate seller cannot sell their property in a timely enough fashion to perform a standard 1031 Exchange, they can now use a Qualified Intermediary to hold title on the property they wish to acquire.

Reverse Exchange Rules

• Reverse Exchanges must be completed in 180 days. The 180 days starts from date the Intermediary purchases the replacement property for the taxpayer.

• Within 45 days of the purchased parked property, an identification form must be completed that identifies the relinquished property that is to be sold.

• A new document called a “Qualified Exchange Accommodation Agreement” must be completed by the Qualified Intermediary and the taxpayer. Upon the sale of an investment property, one can defer all capital gains tax by purchasing a replacement property.

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