If the replacement property must be acquired prior to transferring the relinquished property, the exchange can be structured as a “reverse” exchange under IRS Revenue Procedure 2000-37. These transactions are sometimes referred to as “parking arrangements” because legal title to either the relinquished property or the replacement property is “parked” with an “exchange accommodation titleholder” or EAT. You have a maximum of 180 days to sell the relinquished property to a third party buyer to complete the exchange once the reverse exchange commences with the acquisition of the replacement property.
Since 2005, we have acted as EAT for over $9.2 billion worth of properties. Title to each property is held in a separate limited liability company to insulate that property from the liabilities of any other client’s property. We pledge the membership interest of the limited liability company to you, or grant you a mortgage, to secure your interest in the property.
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.
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 either: (1) the EAT transfers the replacement property to you; or (2) more commonly, you are assigned the membership interest in the EAT as the replacement property (100% ownership of an LLC is treated as the ownership of the assets of the LLC for income tax purposes).
To commence an exchange last transaction, you provide us with the purchase and sale agreement for the replacement property. We then finalize the exchange documentation. The EAT also execute a promissory note to you, and this note is secured by a pledge of the membership interests in the EAT to give you a security interest in the property. You may also obtain third party financing: the loan is typically in the EAT’s name, but you may personally guarantee the loan. However, many 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.
