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What is a reverse exchange?
What are the benefits of using an exchange?
Haven't reverse exchanges been around for a while?
When is a reverse exchange used?
What is an EAT?
What is a QEAA?
What happens if I can't complete my exchange within 180 days?
Why would one do a reverse exchange?
What are the costs of a reverse exchange?
What is an SPE?
Do I have to use an SPE?
What is an Exchange Accommodation Titleholder?
Are leasehold interests considered like-kind?
Why exchange into long-term leases as §1031 Replacement Properties?
Terminology

What is a reverse exchange?
A reverse exchange occurs when a taxpayer acquires a Replacement Property before disposing of their Relinquished Property. The IRS issued "safe harbor" guidelines for reverse exchanges on September 15th, 2000 in Revenue Procedure 2000-37. Compliance with the safe harbor guidelines creates a presumption that the transaction will qualify for §1031 tax-deferred exchange treatment.
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What are the benefits of using an exchange?
Section 1031 of the Internal Revenue code provides that tax on the gains from the sale of real or personal property held for investment or business purposes can be deferred if the property is exchanged rather than sold. A §1031 exchange is one of the few means available to postpone or even eliminate taxes due on the sale of such properties.
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Haven't reverse exchanges been around for a while?
Yes. In the past, reverse exchanges were completed with some frequency even though there was no formal IRS guidance. However, prior to the IRS guidelines issued late last year, the IRS position on reverse exchanges was confusing and taxpayers either proceeded with much caution or ultimately chose to not to do the exchange.
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When is a reverse exchange used?
The reverse exchange transaction is used when an Exchanger wants or needs to acquire the "Replacement Property" (hotlink) before the "Relinquished Property" (hotlink) can be sold. Alternatively, the Exchanger may want to accelerate the exchange of the Relinquished Property in order to acquire the Replacement Property.
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What is an EAT?
Following the IRS guidelines, Reverse Exchange Services, Inc. (RES) acts as the Exchange Accommodation Titleholder ("EAT") to assist the Exchanger in completing a tax-deferred §1031 exchange.
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What is a QEAA?
RES and the Exchanger enter into a written Qualified Exchange Accommodation Agreement ("QEAA") which sets forth the terms of the transaction, set up as a reverse exchange, to ensure that it qualifies for §1031 tax-deferred exchange treatment.
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What happens if I can't complete my exchange within 180 days?
If the reverse exchange period extends beyond 180 days, then the exchange is outside the IRS safe harbor and may be challenged by the IRS. A proper reverse exchange can be structured to go beyond 180 days, but RES, acting as the Exchange Accommodation Titleholder ("EAT"), must not be considered the exchanger's agent and must have true benefits and burdens of ownership of the parked property. RES provides non-safe harbor EAT services through its intermediary Consolidated Resource Management, Inc.
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Why would one do a reverse exchange?
There are a number of reasons why people do Reverse Exchanges, but these are the most common:
Exchanger has the opportunity to purchase an exceptional Replacement Property at a good price or one that fits a particular need but the transaction must close quickly (before the Relinquished Property is sold)
The closing on the Relinquished Property sale transaction fell apart at the last minute and the Replacement Property closing is impending.
Relinquished Property closing deadline cannot be extended and potential loss of earnest money deposit on Replacement Property.
Remodeling or construction needed to increase value of the Replacement Property.
Extreme market conditions.
Large capital gains tax liability.
Desire to gain more control over time to negotiate a good price for the Relinquished Property and still acquire the desired Replacement Property.
Relinquished Property is structured as a partnership or LLC and needs to be restructured as a tenancy-in-common arrangement to meet Exchanger's goals, but closing in the Replacement Property cannot wait.
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What are the costs of a reverse exchange?
Because the IRS rules require RES to report its ownership of the "parked" property as the actual taxpayer, certain transaction costs are inherent. These costs include transfer taxes, recording fees, mortgage taxes, lender charges, other similar assessments (which vary from state to state), escrow and title fees, legal and accounting fees, and the costs of creating a Special Purpose Entity ("SPE") to hold the parked property. The accommodation fee (in addition to these costs) will vary based on the size and complexity of the transaction and whether non-Safe Harbor or construction issues are involved. Call us toll-free at 1-866-276-1031 to discuss your transaction and our fees.
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What is an SPE?
A Special Purpose Entity ("SPE") is a separate legal entity created to qualify for business in the state in which the property is located. The SPE will only own one property during its life. The primary reason for having an SPE is to protect the property, and the transaction, from potential problems that could arise with another taxpayer's transaction.

In an "exchange first" reverse exchange, the SPE will purchase and park the Relinquished Property (and the Exchanger will have an immediate exchange), and then the SPE will sell the Relinquished Property to the ultimate third party buyer.In an "exchange last" reverse exchange, the SPE will purchase and park the Replacement Property, and then when the Exchanger is able to sell the Relinquished Property to the ultimate third-party buyer, the exchange will be completed when the Exchanger acquires the Replacement Property from the SPE.
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Do I have to use an SPE?
Under certain limited circumstances, the requirement of a separate SPE may be waived and the parked property can be acquired by a multiple-asset RES entity, which will own other similarly qualified properties pursuant to QEAAs with other persons. However, this is done only at the discretion of the principals of RES under certain conditions, including a requirement that the "parked" property have a value of under $500,000.
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What is an Exchange Accommodation Titleholder?
Following the IRS guidelines, Reverse Exchange Services, Inc. (RES) acts as the "Exchange Accommodation Titleholder" to assist the Exchanger in completing its tax-deferred 1031 exchange. RES and the Exchanger enter into a written "Qualified Exchange Accommodation Agreement" (or "QEAA") whereby RES agrees to purchase and hold title to the "parked" property until the Exchanger is ready to sell its Relinquished Property. When the Relinquished Property is sold, the exchange proceeds are used to acquire the Replacement Property from RES.
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Are leasehold interests considered like-kind?
A leasehold interest with a remaining term of 30 years or more is considered "like-kind" property to a fee interest in any other real estate held for productive use in a trade or business or for investment. If a leasehold interest has an unexpired term of less than 30 years, it is not treated as a qualifying §1031 property. However, if the lease provides for optional renewal periods (which must be at or near market terms), these periods can used to count toward whether the leasehold has 30 years or more remaining.

Why exchange into long-term leases as §1031 Replacement Properties?
Many real estate investors have accumulated substantial real estate portfolios over a period of many years. In many instances, these investors have completed a §1031 tax deferred exchange into Replacement Properties. The exchange transaction has allowed them to eliminate the payment of capital gain taxes and roll equities into larger and better performing properties. Now that investors have met many of their long-term investment objectives, they desire to increase their monthly cash flow and simultaneously reduce the management problems typically associated with most real estate investments. An ideal solution is to exchange into a net leasehold interest, providing excellent cash flow with fewer responsibilities associated with the ongoing management of the property.

Terminology

Deferred gain: Amount of "realized gain" that is not currently taxable.

Exchange Accommodation Titleholder: Following the IRS guidelines, Reverse Exchange Services, Inc. (RES) acts as the Exchange Accommodation Titleholder ("EAT") to assist the Exchanger in completing a tax-deferred §1031 exchange.

Exchange First Reverse Exchange: In an "exchange first" reverse exchange, the SPE will purchase and park the relinquished property (and the Exchanger will have an immediate exchange), and then the SPE will sell the relinquished property to the ultimate third party buyer.

Exchange Last Reverse Exchange: In an "exchange last" reverse exchange, the SPE will purchase and park the Replacement Property, and then when the Exchanger is able to sell the Relinquished Property to the ultimate third-party buyer, the exchange will be completed when the Exchanger acquires the Replacement Property from the SPE.

Like Kind: No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for 'like-kind' property which is to be held either for productive use in a trade or business or for investment.

Qualified Exchange Accommodation Agreement: RES and the Exchanger enter into a written Qualified Exchange Accommodation Agreement ("QEAA") which sets forth the terms of the transaction, set up as a reverse exchange, to ensure that it qualifies for §1031 tax-deferred exchange treatment.

Qualified Intermediary: A third party or facilitator who is an independent principal who assists in completing a successful section 1031 tax-deferred exchange.

Realized gain: Difference between sales prices and adjusted tax basis.

Recognized gain: Amount of "realized gain" that is currently taxable.

Relinquished Property: The property the Exchange is selling. Also called the old property.

Replacement Property: The property the Exchanger is buying. Also called new property.

Safe Harbor: The term "safe harbor" refers to the guidelines issued by the IRS for reverse exchanges on September 15th, 2000 in Rev Proc. 2000-37 (hotlink). Compliance with the safe harbor guidelines makes the presumption that the transaction will qualify for §1031 tax-deferred exchange treatment.

Section 1031: Section 1031 of the Internal Revenue code provides that tax on gain from the sale of real or personal property held for investment or business purposes can be deferred if the property is exchanged (rather than sold) for other like-kind property.

Special Purpose Entity: A Special Purpose Entity ("SPE") is a separate legal entity created to qualify for business in the state in which the property is located.
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