The Reverse 1031 Exchange Broken Down

Blah, Blah, Blah

Reverse 1031 exchanges can seem like a complete foreign language to the typical real estate investor.  It probably sounds something like blah, blah, blah, blah when they are speaking with a 1031 exchange Qualified Intermediary and a reverse 1031 Exchange Accommodation Titleholder. 

We Break It Down For You

This 1031 Exchange Institute blog post is designed to break down the complex world of reverse 1031 exchange strategies and structures into "somewhat" easier to understand language.  So, here goes. 

Not a True Reverse 1031 Exchange

First, the real estate investor needs to understand that the reverse 1031 exchange is really not a reverse 1031 exchange because the true reverse 1031 exchange would mean that the real estate investor could acquire his or her replacement property first and own both the relinquished and replacement properties at the same time while he or she is trying to sell the relinquished property.  This true or pure reverse 1031 exchange simply does not exist.  The real estate investor is not permitted to own both properties at the same time. 

Parking Arrangements Under Revenue Procedure 2000-37

Enter Revenue Procedure 2000-37 and the Parking Arrangement.  Revenue Procedure 2000-37 was issued by the Internal Revenue Service on September 15, 2000, which outlines how a reverse 1031 exchange can be structured by using a parking arrangement whereby an Exchange Accommodation Titleholder can acquire and hold or "park" title to one of the real estate investors properties involved in the reverse 1031 exchange while the real estate investor is attempting to sell the current property. 

Qualified Intermediary and the Exchange Accommodation Titleholder

Two entities are now required in order to properly and safely structure a successful reverse 1031 exchange transaction under Revenue Procedure 2000-37. 

The Qualified Intermediary

The 1031 exchange Qualified Intermediary is still responsible for setting up the 1031 exchange and for creating the legal documentation for the 1031 exchange.  The Internal Revenue Service has now created an Exchange Accommodation Titleholder or EAT pursuant to Revenue Procedure 2000-37.  The real estate investor will sign a 1031 Exchange Agreement between the Qualified Intermedairy and themselves. 

The Exchange Accommodation Titleholder or EAT

The EAT's sole responsibility is to acquire and hold or park title to one of the real estate investors properties involved within the reverse 1031 exchange.   Remember, as posted in one of my most recent blog posts, this entity should be setting up new individual separate limited liability companies for each transaction to protect each individual investor.  The real estate investor will sign an Exchange Accommodation Titleholder Agreement. 

The actual 1031 exchange is either a simultaneous or concurrent 1031 exchange at the back end ("Exchange Last") or at the front end of the overall transaction.