Reverse Exchange

Set forth herein is the process of the reverse exchange by Title Exchange Company. The exchange is being undertaken in accordance with Revenue Procedure 2000-37. This "safe harbor" regulation allows considerable latitude to the taxpayer in its involvement with the replacement property during the delay necessary to sell the relinquished property.

The steps in the process are as follows:

  1. The taxpayer enters into the contract to acquire the replacement property and arranges acquisition financing, if necessary.


  3. The taxpayer executes a "Qualified Exchange Accommodation Agreement" ("QEAA") with the exchange accommodation titleholder ("EAT") (the LLC holding company), a disregarded single purpose entity controlled by Title Exchange Company ("QI").


  5. The EAT acquires title to the replacement property with financing, if necessary, guaranteed by the exchanger and secured by a mortgage from the EAT. Title Exchange Company uses the single member, special purpose, single asset limited liability company to hold title.


  7. To comply with Revenue Procedure 2000-37, the relinquished property must be identified within 45 days. Title Exchange Company usually does that in the QEAA.


  9. If applicable, the QEAA will provide for a triple net lease of the "parked property" to the taxpayer during the parking period of the reverse exchange with the lease rate set at a level to cover any debt service requirements and operating expense requirements of the EAT during the parked period. This may also include the fees of the EAT as a lease payment.


  11. The taxpayer locates a buyer for the relinquished property and negotiates an acceptable purchase agreement.


  13. The taxpayer executes a "forward exchange agreement" with Title Exchange Company and assigns the purchase agreement on the relinquished property to Title Exchange Company.


  15. The taxpayer direct deeds the relinquished property to the buyer (as provided in the IRC Regulations), who transfers the exchange proceeds to the QI, Title Exchange Company. The QI, Title Exchange Company, uses those proceeds to pay for the parked property satisfying any closing costs and acquisition debt.


  17. The QI, Title Exchange Company, directs the conveyance of the parked property to the taxpayer by "direct deeding" the parked property to complete the exchange. This must occur within 180 days of the EAT taking title to the replacement property. Alternatively, and generally preferred by the taxpayer, is to have the single purpose limited liability company membership transferred to the taxpayer. As a disregarded entity, ownership of the LLC represents ownership of the property owned by the LLC for tax purposes.


Generally, these are the steps in the construction exchange process.

By couching the transaction under this "safe harbor" regulation, we avoid issues that had been previously thought to be required, to-wit:

  • The EAT is not required to have any equity investment in the parked property during the safe harbor parking period


  • The EAT can be indemnified by the taxpayer or disqualified person against costs and expenses associated with the parking transaction.


  • The EAT is not required to guarantee any indebtedness incurred to acquire the parked property; and any taxpayer guarantee of the acquisition financing is permitted.


  • The EAT is not required to control the management or operation of the parked property, which can effectively be delegated to the taxpayer under a management or lease agreement.


  • The EAT is not required to control or supervise any construction of improvements on the parked property; the taxpayer may approve the construction contract and change orders.


  • The EAT is not required to profit on the transfer of the parked property to the taxpayer; and the EAT is not required to bear any significant risk of loss for the parked property.