1031 Exchanges

When performing standard 1031 exchange transactions, investment property sells first. After this sale, the seller purchases a new piece of real estate. A reverse exchange allows for the acquisition of new property before the sale of the existing investment.

IRS Revenue Procedure 2000-37 sanctions the reverse exchange “safe harbor” rule. This procedure provides a parking arrangement for investments. Suppose a seller cannot sell the existing property within the standard 1031 exchange time frame. In that case, an Exchange Accommodation Titleholder (EAT) can hold title on the desired property until the first property sells. The seller is then able to take possession of the new investment parcel from the EAT.

In many cases, a taxpayer considering a reverse exchange will not have the cash to fund purchasing the new replacement property. They often need to obtain financing for the purchase. Depending on the lender’s financing structure restrictions, it may not be possible to park the replacement property in the EAT. The taxpayer may be able to structure what is known as a "Forward" or "Relinquished Reverse Exchange." Here, the taxpayer parks the relinquished property with the EAT rather than the replacement property in the EAT. Using this approach, the taxpayer transfers their interest in the relinquished property, allowing them to purchase the replacement property in their name. Certain restrictions apply for completing this type of exchange.

In an Improvement or Construction Exchange, the proceeds from the relinquished property sale are used to acquire the replacement property and make the desired improvements. This exchange is also known as a “Build-to-Suit” Exchange. The property must be held (parked) by an Exchange Accommodation Titleholder (EAT). The EAT must hold the property until either the improvements are completed, or the 180-day exchange deadline occurs. On or before the 180th day, the improved property must transfer to the exchanger as the replacement property.

These transactions may also be structured as Reverse Improvement Exchanges. Due to the transactional complexity of these exchanges, please contact Midland 1031 to discuss your specific situation.

Reverse Improvement Exchanges allow the taxpayer to acquire the replacement property before closing on their relinquished property. These exchanges incorporate improvements to the replacement property to increase the property's value.