A reverse exchange is used when the exchanger must purchase replacement property prior to selling the relinquished property.
IRC rules prohibit exchangers from owning the relinquished and replacement properties simultaneously, but a "safe harbor" provision provided in Revenue Procedure 2000-37 enables an Exchange Accommodation Titleholder (EAT), such as JELD-WEN 1031, to enter into a "parking arrangement" and acquire title to either the relinquished or replacement property.
Steps in a Reverse Exchange
Replacement Property Parked
- The EAT acquires title to the replacement property with loans to the EAT funded by the exchanger.
- The EAT and exchanger enter into an agreement regarding any management of the replacement property during the exchange period.
- The exchanger has 45 days to identify the relinquished property.
- The exchanger has 180 days to sell and transfer the relinquished property to a purchaser.
- Replacement property is deeded to the exchanger by JELD-WEN 1031. Net proceeds from the sale of the relinquished property repay the exchanger loans provided to JELD-WEN 1031 for the purchase of the replacement property, and complete the exchange.
Relinquished Property Parked
- The exchanger conveys title to the relinquished property to the EAT prior to the closing of the replacement property.
- The EAT and exchanger enter into an agreement regarding any necessary management of the relinquished property during the exchange period.
- The exchanger acquires title to the replacement property on the scheduled closing date.
- Within 180 days the relinquished property is transferred to a purchaser. Any net proceeds from the sale are used to repay the exchange loan owed by EAT to exchanger.