What Is a Reverse Exchange?

A reverse exchange, known as a reverse 1031 exchange, is a way to defer paying taxes on capital gains. The capital gains tax is incurred once there is a sale of real property. The seller finds new property, the replacement property, and then has time limitations on when to sell the old property. The old property is referred to as the relinquished property.

Parking Legal Title

The seller has to transfer legal title of the replacement property to an Exchange Accommodation Titleholder (EAT) until the relinquished property is sold. To qualify under the safe harbor rules outlined in Revenue Procedure 2000-37, the relinquished property has to be sold no later than 180 days after the title is transferred to the EAT. There are exceptions to the rules, known as non-safe harbor rules. These rules have a 180 day extension requirement. The seller also has to identify the relinquished property no later than 45 days after the EAT obtains legal title.

Benefit of Reverse Exchange

The main benefit is that the seller has more time to find and acquire a replacement property. In a regular 1031 exchange, the seller has to find the replacement property no later than 180 days after selling the relinquished property. It can be difficult to do in some markets due to external economic conditions. The best way to take advantage of a reverse exchange is to hire an attorney with experience and knowledge.

blog comments powered by Disqus