The IRS has given specific guidelines for structuring a reverse 1031 like-kind property exchange.  Because this type of transaction is complicated, it is important to seek assistance from qualified real estate, legal and tax experts before entering into such an arrangement.

The taxpayer may acquire their like-kind replacement property first and then sell the relinquished property later. A person selling one property can identify and purchase a replacement property, and then “park” it with an Exchange Accommodation Titleholder (EAT), who acquires and holds legal title to the taxpayer’s property on their behalf.

A Qualified Intermediary (QI) facilitates the 1031 tax-deferred, like-kind exchange.  It is recommended that the EAT and the QI be different entities, but it is not required.  Taxpayers must not have actual possession or control over their 1031 exchange funds during the exchange period.

The EAT may hold (park) title to either the replacement property or relinquished property, depending on a number of complex factors within each individual transaction. The most commonly used approach is called “Exchange Last”, where the EAT acquires and holds title to the taxpayer’s replacement property until the relinquished (original) property is sold.  The taxpayer must identify the relinquished property within 45 calendar days after transferring title of the replacement property to the EAT. The Reverse 1031 Exchange must be completed within 180 days.

When parking title to the replacement property with the Exchange Accommodation Titleholder (EAT) is not feasible, title to the relinquished property is parked with the EAT in the “Exchange First” method.  When the seller transfers the relinquished property to the EAT, they do not need to identify a replacement property immediately, because the simultaneous exchange takes place at the beginning of the transaction.  When they find a buyer for the relinquished property, the EAT direct deeds the property to the buyer and transfers any net sales proceeds to the seller. The Reverse 1031 Exchange must be completed within 180 days.

Fees for Reverse Exchanges are higher than fees for traditional “Forward Delayed” 1031 exchanges, because there is extensive documentation and additional risk assumed by the EAT in taking title to the “parked” property.  Sellers will also have to pay additional title insurance, environmental, loan, legal, property, casualty and liability insurance, and escrow/closing costs.

Although reverse 1031 exchanges are more expensive than traditional, “Forward Delayed” 1031 Exchanges, they can save taxpayers thousands of dollars in capital gains tax.