Reverse Exchange

Overview Of A Reverse Exchange
A Reverse Exchange enables companies and individuals (Exchangers) to structure a 1031 exchange, where the normal Forward Exchange sequence is not feasible. In addition to retaining the benefit of substantial tax deferral on gains from the sale of property, this solution allows great flexibility to accommodate the business needs of the Exchanger. For example, the Exchanger may improve the property or lease it during the exchange period.

A Reverse Exchange consists of a Forward Exchange, which is either preceded or followed by a Parking Arrangement. IRS Revenue Procedure 2000-37 provides the rules for a “safe harbor” Parking Arrangement. A Parking Arrangement uses a third-party facilitator to park either the relinquished property or the replacement property. There are two types of Reverse Exchanges:

Exchange Last
The facilitator acquires the property to be parked and holds it until the relinquished property is sold, then transfers the parked property to the Exchanger as its replacement property.

Exchange First
The Exchanger buys the replacement property and transfers the relinquished property to the facilitator (which constitutes the exchange), and the facilitator then parks the relinquished property until it can be sold to a buyer.

In both instances, the Exchanger will also enter into an exchange agreement with a Qualified Intermediary (QI), such as NES, to create an exchange using the sale of the relinquished property and the purchase of the replacement property.

Reverse Exchange Requirements:

• The third-party facilitator creates a Special Purpose Entity (such as an LLC) to acquire title to the property to be parked.
• A QI to serve as the Exchange Facilitator for the Forward Exchange.
• Documentation for both the forward and parking transactions.
• Agreements for special needs such as lease or construction management agreements.
• The combined time frame that the relinquished property and the replacement property are held in a Reverse Exchange may not exceed 180 days.
• In an Exchange Last, identification of the relinquished property must be made no later than 45 days after the facilitator acquires the title to the parked replacement property.

NES Services

NES offers an unsurpassed level of expertise and experience in conducting smooth, secure and successful Reverse Exchanges and works closely with clients and their advisors through every stage of the exchange. NES integrates the role of the QI and the third-party facilitator through these services:

• Creating a Special Purpose Entity (such as an LLC) to acquire title to the property to be parked.
• Opening a new exchange account and working closely with clients and their advisers through every stage of the exchange.
• Preparing the exchange and parking documents.
• Providing the Exchange Accommodation Titleholder and QI services for the transaction.
• Establishing a Qualified Escrow or Qualified Trust account to hold and protect the proceeds from the sale of the relinquished property, if necessary.
• Assisting with timely notifications of deadlines.
• Persistent digital archive of executed exchange documentation.

Click on the link below for more in-depth information about NES' Reverse Exchange solution:

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