The Reverse 1031 Exchange

July 2, 2018

Overview of the Reverse 1031 Exchange


This article presents a very brief and concise overview of the safe-harbor Reverse 1031 Exchange transaction.  You can learn more about safe-harbor Reverse 1031 Exchanges by reading our more in depth article entitled Introduction to Reverse 1031 Exchanges, which includes more detailed information on Reverse 1031 Exchange structures, strategies and compliance issues. 


1031 Exchange transactions, especially Reverse 1031 Exchanges, are complex tax-deferred tax strategies.  You should always seek competent legal, financial and tax counsel before entering into any Forward or Reverse 1031 Exchange transaction.  


Reverse 1031 Exchanges


There are many reasons why you might find yourself in a position where you must acquire or would prefer to acquire your like-kind replacement property first before you sell your current relinquished property in your 1031 Exchange. 


You might unexpectedly find an investment opportunity that you must act on before you even have time to consider selling or listing your current relinquished property.  The sale or disposition of your relinquished property may unexpectedly collapse and you do not want to lose your acquisition that is closing soon.  Or, you may prefer to buy first to eliminate the pressure of having to identify your like-kind replacement property within the 45 calendar day identification deadline in a regular Forward 1031 Exchange. 


What ever your reason for deciding to purchase your replacement property first, the Reverse 1031 Exchange allows you to acquire your like-kind replacement property first and then subsequently list and sell your relinquished property within the prescribed 1031 Exchange deadlines.  It can be a great strategic tool when needed or preferred.


Revenue Procedure 2000-37 — The Safe Harbor Reverse Exchange


The Internal Revenue Service issued Revenue Procedure 2000-37 on September 15, 2000, which provides a safe-harbor for how to properly structure a Reverse 1031 Exchange transaction by using a parking arrangement in conjunction with a simultaneous 1031 Exchange.  Reverse 1031 Exchanges that fall outside of this Revenue Procedure may still qualify and are referred to as non-safe-harbor Reverse 1031 Exchange transactions. 


Simultaneous 1031 Exchange


The actual 1031 Exchange portion of your Reverse 1031 Exchange transaction is a simultaneous or concurrent 1031 Exchange either at the beginning or end of your Reverse 1031 Exchange transaction.  You will enter into a 1031 Exchange Agreement with a Qualified Intermediary for the administration of your 1031 Exchange 


You will enter into another agreement called the Qualified Exchange Accommodation Agreement ("QEAA") that will structure the parking arrangement for your Reverse 1031 Exchange.  The QEAA is signed by you and the Exchange Co, as your Exchange Accommodation Titleholder ("EAT").  The Exchange Co.  Titleholder ("EAT") is the entity that will acquire and hold or "park" legal title to either your relinquished property or your like-kind replacement property during your Reverse 1031 Exchange transaction.


Reverse 1031 Exchange Structures


The challenge in structuring your Reverse 1031 Exchange is deciding which of your investment properties will be acquired and held or "parked"   The structure selected by you will depend on whether there is financing involved and which investment property your lender will allow the exchange co. to hold or park legal title to.


The two structures are commonly referred to as Exchange Last and Exchange First because the simultaneous 1031 Exchange occurs either at the beginning (Exchange First) or at the end (Exchange Last) of your Reverse 1031 Exchange transaction.


Transactions structured outside of the safe-harbor guidelines, generally referred to as non-safe-harbor Reverse Exchanges, must be structured very differently.


Exchange Last Structure


The Exchange Last Reverse 1031 Exchange structure is the preferred strategy because it will provide you with the most flexibility in terms of structuring and financing your Reverse 1031 Exchange transaction.  It also provides you with more advanced structuring capabilities. 


Your like-kind replacement property is acquired and held or "parked" by the Exchange Accommodation Titleholder ("EAT") and a simultaneous or concurrent 1031 Exchange is completed later at the close of your relinquished property sale transaction (i.e. the simultaneous 1031 Exchange occurs at the back-end of your Reverse 1031 Exchange).

The primary obstacle with this structure will be your lender.  Lenders are concerned about the Exchange Accommodation Titleholder holding or parking title to the like-kind replacement property that will be used as collateral for the loan.  

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San Ramon, CA 94583

CA. 01147469

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