Reverse Exchange Services, Inc.
Reverse exchange structures for investors who need to acquire replacement property before disposing of relinquished property.
The Different Types of Reverse Exchanges
Parking title when the ordinary sequence will not work.
A reverse exchange reverses the usual order of events. The replacement property is acquired first, and the relinquished property is sold later. Because a taxpayer cannot exchange into property it already owns, the transaction uses an Exchange Accommodation Titleholder structure.
Reverse Exchange Services, Inc. forms a special purpose entity to purchase and park the property, coordinate documents, and transfer the property at the appropriate stage of the exchange.
When a reverse exchange may fit
A reverse exchange is often considered when an investor finds the right replacement property before the relinquished property is ready to close, when a sale has delayed or failed, when construction must be completed before exchange value is received, or when market conditions make waiting too risky. These transactions should be reviewed early because title, financing, insurance, construction control, and ownership documentation all affect the structure.
Why Do a Reverse Exchange?
Situations where timing creates opportunity or risk.
Reverse exchanges are usually driven by a property opportunity that will not wait. The structure gives investors a way to pursue replacement property while the relinquished property sale, entity planning, or construction work is still being resolved.
- Exceptional propertyChance to purchase an exceptional replacement property at a good price or one that fits a particular need and must close quickly.
- Failed sale timingThe relinquished property transaction fell apart at the last minute.
- Deposit protectionPotential loss of deposit on replacement property.
- Construction valueRemodeling or construction is needed to increase the value of the replacement property.
- Market pressureExtreme market conditions or a large capital gains tax liability require more control over timing.
- Entity planningThe relinquished property is structured as a partnership or LLC and needs restructuring to meet exchange goals.
RES Process
Tasks performed in a typical reverse exchange.
Create Special Purpose Entity
RES creates a separate legal entity and qualifies it to do business in the state where the property is located. The separate entity protects the property and transaction from issues in other transactions.
Arrange Financing for SPE Acquisition
RES helps coordinate financing of the replacement property with the Exchanger, a third-party lender, and when applicable, a Qualified Intermediary holding exchange proceeds.
Prepare Documentation
Documents can include the Qualified Exchange Accommodation Agreement, lease, ground lease, loan documents, assignment documents, project management agreements for build-to-suit work, and instructions that clarify how the parked property will be transferred at the correct stage of the exchange.
Coordinate Closing and Ownership
RES coordinates the acquisition closing, insurance, escrow documentation, monitoring of the parked property, and any construction disbursements during the parking period. This work helps lenders, title companies, contractors, and advisors understand who owns the property during each phase.
Monitor Safe Harbor Timing
Many reverse exchanges are planned around the IRS safe harbor framework in Rev. Proc. 2000-37, including the parking period and exchange milestones. Timing should be reviewed with tax and legal advisors before commitments are made.
Complete Transaction and Dissolve SPE
When the exchange is ready, the SPE completes the exchange-first or exchange-last transaction path, accounts for the sale on its books, transfers ownership as required by the exchange plan, and is dissolved after it no longer owns property.
Terminology
Reverse exchange vocabulary.
- EATExchange Accommodation Titleholder, the party that holds parked property in the reverse exchange structure.
- QEAAQualified Exchange Accommodation Agreement setting forth the terms of the reverse exchange.
- SPESpecial Purpose Entity formed for a specific Exchanger and property.
- Safe HarborGuidelines issued by the IRS in Rev. Proc. 2000-37 for reverse exchanges, commonly used to plan timing, ownership, identification, and completion requirements.
RES FAQ
Questions clients often ask before choosing a reverse path.
What is a reverse exchange?
A reverse exchange is a tax deferred exchange in which replacement property is acquired before the relinquished property is sold.
When is a reverse exchange used?
It is often used when a replacement property must close quickly, when the old property sale is delayed, or when construction or improvement work must be completed before the exchange is finalized.
Why would one do a reverse exchange?
The main reason is control over timing. A reverse exchange can protect a replacement opportunity while the old property sale or entity planning remains unresolved.
What is an SPE?
An SPE is a Special Purpose Entity created to own parked property during a specific reverse exchange transaction.
How early should RES review a reverse exchange?
RES should review the transaction before the replacement property acquisition closes. Early review helps determine how title will be parked, how financing and insurance will be arranged, whether construction or improvement work is involved, and how the intended sale of the relinquished property fits the exchange timeline.
Can a reverse exchange include improvements?
Yes, some reverse transactions include construction or improvement work while the property is parked. Those exchanges require early review of budgets, contracts, title, disbursement controls, completion timing, and the value needed before the exchange is finalized.