A reverse 1031 exchange is a tax deferral strategy created in Section 1031 of the Internal Revenue Code providing a mechanism for taxpayers to enter into an exchange of property in lieu of a traditional sale. A Section 1031 exchange is an attractive option for taxpayers because when a transaction qualifies for Section 1031 treatment any capital gains taxes that would otherwise be due are deferred. Over the last century, the Section 1031 rules and regulations have evolved to meet the increasingly complex demands of taxpayer transactions. A number of safe harbor provisions have been built in to Section 1031 exchanges in order to facilitate the transactions. For example, Revenue Procedure 2000-37 provides a safe harbor provision for parking a title during a reverse 1031 exchange.
Reverse 1031 exchanges were officially recognized with Revenue Procedure 2000-37, providing a safe harbor for the Exchange Accommodator Titleholder (EAT) to park either the relinquished (old) or replacement property for up to 180 calendar days. Prior to this milestone, 1031 exchanges were either forward or simultaneous exchanges where the old property is closed before the new property is acquired. Simultaneous 1031 exchanges are those where the old and new properties are exchanged at one closing. Reverses provided flexibility to acquire the new property before selling the old.
Personal property held for use in a business such as helicopters and aircraft can defer capital gains tax and recaptured depreciation when replaced with like-kind aircraft in a 1031 reverse exchange. The General Asset Class 00.21 defines properties as like-class even though the depreciation lives may be different.
As you recall from part I, in a reverse 1031 exchange, the Exchangor is not able to hold both the new or replacement property and the old or relinquished property at the same time. The Exchange Accommodator Titleholder (EAT) is created to take title to the either the old or new property.