Reverse Exchange

A reverse 1031 exchange is a structure in which the investor acquires the replacement property before selling the relinquished property, reversing the normal order of a deferred exchange. Because the tax rules do not permit a taxpayer to own both properties at once and still claim exchange treatment, the replacement (or, less commonly, the relinquished) property is held by an Exchange Accommodation Titleholder (EAT), a special-purpose entity formed by the qualified intermediary, under a Qualified Exchange Accommodation Arrangement. The IRS established a safe harbor for these arrangements in Revenue Procedure 2000-37. The EAT parks the property for up to 180 days, during which the investor must identify the property to be relinquished within 45 days and complete the sale within the 180-day total window, mirroring the deadlines of a forward exchange. Reverse exchanges are useful when an investor finds an ideal replacement property before lining up a buyer for the existing one, or when a competitive market requires acting quickly. They are more complex and considerably more expensive than standard delayed exchanges because they require forming and operating the holding entity, often arranging interim financing, and additional legal work, so they are generally reserved for situations where the timing benefit justifies the cost.