Reverse 1031 Exchange; Part I
Posted by Andy Gustafson on Thu, Jun 17, 2010
A reverse 1031 exchange is when the new property is acquired before the old property is sold. The same 1031 rules and guidelines apply including 180 calendar days to complete the exchange. They are quite common and fulfill a role by allowing the Exchangor to lock up a property quickly rather than waiting for the old property to sell. Reverse exchanges is the strategy used to perform improvement and build to suit exchanges.
Exchange Accommodator Titleholder
The Internal Revenue Service requires that the Exchangor not be on title to both the new and the old property at the same time. Enter the strange term, called the Exchange Accommodator Titleholder (EAT). The EAT is a another company, a single member limited liability company that will take title to either the old or the new property. The single member is an independent company from the Qualified Intermediary.
There are different types of reverse exchanges including build to suit, leasehold improvement where the EAT is building on land already owned by the Exchangor and improvement exchanges. In each of these types, the EAT will take title to the new property to perform the improvements.
In a pure 1031 reverse exchange, the EAT can take title to either the new property or the old property. If a lender is involved with the acquisition, they typically do not like a limited liability company on title, because the note is non recourse to the lender. It is possible and can be done. I find it easier to hold title to the old property allowing the Exchangor to purchase the new property in their name.
Part II will address how the new property is transferred to the Exchangor when the EAT takes title to the replacement property.
Care to discuss whether a reverse 1031 exchange makes sense for your transaction? Call us at 850-496-0090. Ask for Andy, the Certified Exchange Specialist®.