Reverse Exchange: A brief overview

What Is A Reverse Exchange?
A reverse exchange is used when an investment property owner wants to buy the replacement property before selling their existing property; while qualifying their transaction under the Internal Revenue Code Section 1031.

When To Do A Reverse Exchange
There are several uses for a reverse exchange here are a few common reasons:

1.	The Property that you are interested in is unique and is only available for purchase now. The seller of that property is not willing to wait for you to sell your existing property.
	Example: The Smiths found the vacation house of their dreams. It was for sale but in order to maximize their tax benefits they would like to sell their existing rental and take that money and apply it to the purchase of this vacation house.
2.	The property that you want is a deal of a lifetime. The price is right. The expenses involved are relatively small compared to the potential upside of the completed transaction.
	Example: Sam owns a mid-rise commercial building. His neighbor Joe is interested in selling his strip-mall at half the market value to Sam if he can complete the sale within 30 days. Sam does not want to keep his existing commercial building and would ideally like to sell it before buying Joe’s strip mall.
3.	An owner of investment property wants to sell their existing property and do an exchange but does not want to worry about finding replacement property under any time restraints. With a reverse exchange the time periods don’t begin until the replacement property closes.

How To Do A Reverse Exchange

Step 1
The investment property owner enters into a contract to buy the replacement property the same way as is customary in their area.

Step 2
The seller of the replacement property is made aware that the sale of the property will involve a reverse exchange but that it will NOT delay the closing. A clause should be written into the contract stating: "This contract is subject to a reverse exchange per Revenue Procedure 2000-37. Seller agrees to cooperate with this procedure at no cost to them"

Step 3
Vesta prepares the necessary agreements and creates an independent tax entity. The agreements assign the purchase contract to the new entity. This new entity will take title to the replacement property and close escrow.

Step 4
The new entity holds on to the property until the existing property is sold. The maximum time the new entity can hold the property is 180 days from the close of escrow on the replacement property.

Step 5
The existing property is sold and a simultaneous exchange occurs between the investment property owner and the new entity. This completes the exchange process.

Financing Issues
Funds to close the transaction can come from various sources such as:

Cash savings
Cash advances on credit lines
Direct lending where the guarantor of the note is the investment property owner

The Reverse Exchange Procedures

On September 15, 2000 the Internal Revenue Service released Revenue Procedure 2000-37, which provides a safe harbor guideline for doing reverse exchanges.
In order to follow these new procedures reverse exchanges must comply with the following provisions:

1. The property must be held by a separate entity who is not the taxpayer or a disqualified person and who is subject to federal income tax.

2. The taxpayer must have the intent that the property be held as either replacement or relinquished property in a qualifying exchange.

3. Within 5 days after the transfer of the property to the separate entity a written agreement must be entered into.

4. 45-days after the transfer of the replacement property to the separate entity the relinquished property is properly identified.

5. No latter than 180 days after the transfer of the property to the separate entity the property is transferred to the taxpayer.

The information described above is simply a brief overview of the new provisions and is not intended to provide a complete or comprehensive coverage of the revenue procedures. All taxpayers should consult with their tax and legal advisors regarding their particular circumstances.

For more information on Reverse Exchanges, you are invited to call us at our National Toll Free Number (888) 212-1031 where we will assign a Reverse Exchange Advisor to you at no cost or obligation.