The Reverse Exchange
A reverse exchange happens when the replacement property is acquired before the relinquished property is sold. The Qualified Intermediary (QI) purchases the replacement property on behalf of the Exchanger and holds title while the Exchanger attempts to sell the relinquished property. A reverse exchange necessitates the use of an “exchange accommodation titleholder” or “EAT”. Usually an EAT is a single member LLC set-up by the QI specifically for a reverse exchange.
There are two types of reverse exchanges.
1) Park the Replacement Property. The Exchanger and EAT enter into a written agreement. The EAT then acquires title to the replacement property and holds it until the relinquished property is sold. As the relinquished property is ready to close, the EAT enters into a simultaneous exchange with the Exchanger. Title to the replacement property is then transferred to the Exchanger who in turn transfers title of the relinquished property to a third party buyer.
2) Park the Relinquished Property. The QI, on behalf of the Exchanger, purchases the replacement property and deeds it directly from the seller to the Exchanger. Subsequently, the Exchanger transfers the relinquished property to the EAT, who holds the relinquished property until a buyer is found. Once the buyer is found, the relinquished property is sold to the third party buyer by the EAT.
The EAT will generally enter into a lease agreement with the Exchanger to allow the Exchanger management responsibilities over the property during the parking period. Reverse exchanges can be very complex, especially if financing is involved. Be sure to utilize the services of an experienced QI, like Exchange Alliance Group, before embarking on a reverse exchange to avoid any unforseen issues.
The reverse exchange follows the same 45 day and 180 day timeline as a delayed exchange. The Exchanger has 45 days to identify one or more relinquished properties. Identification of all relinquished property must be made by the Exchanger in writing, signed and dated and must be delivered to the EAT or an authorized recipient on or before the 45th day. No extension is allowed if this date falls on a Saturday, Sunday, or legal holiday. You may not identify relinquished property after the 45th day. The exchange must be completed within 180 days.
