Reverse Exchanges

Typical exchanges are forward in nature and dictate selling the old property first before buying the new one. Unlike a forward exchange, you may be in a situation where you want or need to buy the new property before you’ve sold the old one. The problem is the IRS will not allow you to hold title to both the old and new properties at the same time.

The Reverse Exchange allows you to conduct the exchange in the reverse order, yet still enjoy the tax benefits. In a reverse exchange, your QI arranges to buy the new property for you and holds it for a period of time.

There are several reasons to consider the reverse exchange:

• Market conditions are making it difficult to find a buyer for your old property, and the new one you want is priced to sell.
• You need to buy the new property now, but desire more time to sell the old one to get the “right price”.
• You want to make improvements to the new property, or construct a new building on raw land.
• You face the possibility of losing your deposit or favorable financing rates.

In these circumstances, the reverse exchange provides you with the flexibility, leverage and buying power while preserving your equity through a tax deferral.

The IRS Position on Reverse Exchanges

In 2000, the IRS issued Revenue Procedure 2000-37, known as a “Safe Harbor Reverse”, a ruling that gives taxpayers guidance on how to safely conduct the reverse exchange. These guidelines are precise, require specific documentation and must be completed within 180 days.

If your situation is such that the reverse may fall outside the 180 days, such as in construction projects, then Traditional Reverse Exchanges (non-safe harbor) have helped clients in these situations for many years.

While Safe Harbor and Traditional reverse exchanges are similar, there are unique considerations and procedures for each. Working with our CPA’s and Attorneys to structure your reverse exchange will give you the confidence and assurance to meet your needs and stand up to IRS scrutiny.