Reverse Exchange Structures

A reverse exchange may be structured in two different manners, as described below.

Exchange First:  EAT Acquires Relinquished Property

In this structure, you transfer the relinquished property to the exchange accommodation titleholder (EAT) at the time that you acquire the replacement property. A deed  or other conveyance document for the relinquished property must be prepared by a local attorney or title company transferring the property to the EAT. You also provide us with the purchase and sale agreement for the replacement property. We finalize the exchange documentation and also execute a non-recourse note secured by a pledge of the membership interests in the EAT to give you security in the property. You should check to be sure the transfer of the relinquished property to the EAT does not violate a "due on sale" provision contained in any loan documents related to the relinquished property.

The EAT takes title to or “parks” the relinquished property. The EAT executes a “triple net” lease so that you collect rents and pay mortgages, taxes and utilities on the relinquished property during the period that the EAT holds title. You should maintain the liability and property insurance, naming the EAT as “additional insured.” The EAT is required to report the ownership of the relinquished property on its federal tax return. Therefore, you must treat the relinquished property as owned by the EAT on your tax return and you cannot take depreciation or property tax deductions during the parking period. 

Under the IRS safe harbor, you have 180 days from the date the EAT acquires the relinquished property to close the sale of the relinquished property to a third party buyer. 

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Exchange Last: EAT Acquires Replacement Property

In this structure, the EAT acquires the replacement property and holds title until you find a buyer for the relinquished property. When the relinquished property is sold to the buyer, the exchange occurs and the EAT transfers the replacement property to you in exchange for the relinquished property. You provide us with the purchase and sale agreement for the replacement property. We then finalize the exchange documentation. We also execute a non-recourse note to you secured by a pledge of the membership interests in the EAT to give you a security interest in the property. If you are obtaining third party financing, any loan to us must be non recourse, but you may personally guarantee the loan. Most single family residential lenders will not lend to an EAT and you will need to find alternate forms of financing if the replacement property is a single family residence.

You have 45 days from the EAT's acquisition of the replacement property to identify your relinquished property. If you have more than one possible relinquished property, you may also identify alternative relinquished properties. We will send you a follow up letter regarding the identification of the relinquished property.

The EAT takes title to or “parks” the replacement property. The EAT executes a “triple net” lease so that you collect rents and pay mortgages, taxes and utilities on the replacement property during the period that the EAT holds title. The EAT will also enter into a construction contract for any improvements and will appoint you as the project manager for the construction. You should obtain liability and property insurance, naming the EAT as “additional insured.”

The EAT reports the ownership of the replacement property on its federal tax return. Therefore, you must treat the replacement property as owned by the EAT on your tax return and you cannot take depreciation or property tax deductions during the parking period. 

Under the IRS safe harbor, you have 180 days from the date the EAT acquires the replacement property to close the sale of the relinquished property to a third party buyer and take title to the replacement property. 

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