Guides

Reverse 1031 Exchange Explained

A reverse exchange addresses a timing problem that comes up often in a competitive market like Dallas, TX, where a strong replacement property may need to be secured before the relinquished property has actually sold. In a standard forward exchange, the relinquished property closes first and the replacement property closes later. A reverse exchange flips that order, but doing so creates a structural problem, because an investor generally cannot hold title to both the relinquished and replacement property at the same time while still preserving the exchange. The solution used under Revenue Procedure 2000 37 is a parking arrangement involving a qualified exchange accommodation titleholder, commonly called an EAT. The EAT takes and holds title to either the replacement property, in an exchange first structure, or the relinquished property, in an exchange last structure, while the investor works to complete the other side of the transaction. The parking period is generally subject to the same one hundred eighty day outer limit that governs a standard exchange, and the forty five day identification requirement generally still applies, though it is applied to whichever property has not yet been acquired by the investor directly. Financing a reverse exchange typically requires either an all cash purchase by the EAT or a lender willing to extend financing to the accommodation titleholder, which is a more specialized underwriting exercise than a conventional purchase loan. Investors pursuing industrial, flex, or hospitality assets in North Texas sometimes use reverse exchanges specifically because desirable properties move quickly and waiting for a relinquished property to close first would mean losing the opportunity. This page describes the general mechanics of a reverse exchange and is not a substitute for coordination with a qualified intermediary, an exchange accommodation titleholder, and legal counsel experienced in reverse exchange structuring for a specific transaction. Documentation requirements are generally more extensive than a standard exchange, since the EAT agreement, any loan guaranty, and the qualified exchange accommodation agreement itself all need to be drafted and executed before the parking period can properly begin. Investors typically engage counsel with specific reverse exchange experience early in the process rather than after a purchase contract is already signed, since the parking structure generally needs to be in place before, not after, the EAT takes title.