"REVERSE" EXCHANGES

A "reverse" exchange occurs when the replacement property is purchased prior to closing on the sale of the relinquished property. The exchanger uses the Qualified Intermediary to purchase the property they wish to acquire, while they market and attempt to close on the relinquished property.

Most "reverse" exchanges are facilitated through parking the title. In one variation of the parking arrangement, the exchanger enters into an agreement with a Qualified Intermediary who acquires the replacement property and holds title until a buyer is found for the relinquished property. When the relinquished property is ready to close, the Qualified Intermediary enters into a simultaneous exchange with the exchanger, transferring ownership of the parked replacement property to the Exchanger and acquires ownership of the relinquished property, which the Qualified Intermediary then sells to the third party buyer. Alternatively, the relinquished property is parked with the Qualified Intermediary until a buyer can be found and then sold by the Qualified Intermediary to that buyer. The Intermediary will typically enter into a property management agreement or triple net lease executed between the Intermediary and Exchanger or property management company, designated by the Exchanger, during the period of time the Intermediary is on title to either the replacement or relinquished property.

Only a few Intermediaries will take title to the property and bear the risks of ownership during the parking period. The structuring of "reverse" transactions must be done carefully to avoid agency and constructive receipt issues which can disqualify an exchange. Investors should always receive the advice of their tax or legal counsel before proceeding with this type of exchange.

Unlike most exchange variations, where exchangers can rely on the Treasury Regulations 1.1031(k)-1, primary substantiation governing this exchange format originates from legal precedent. In Bernie D. Rutherford v. Commissioner, the Tax Court held that a "reverse" exchange involving heifers qualified for like-kind exchange treatment. A similar positive ruling was achieved in a real property exchange Biggs v. Commissioner 69tc 905 (1978); AFFIRMED 632f2D 1171 (5th Cir. 1981) in which the exchanger loaned funds to an Intermediary. The Intermediary used the loan proceeds to purchase the replacement property and held it while the exchanger located a buyer for the relinquished property. A successful exchange resulted.