Reverse Exchanges of either type are common and occur when a taxpayer arranges for an Exchange Accommodation Titleholder (EAT) (usually the Intermediary) to take and hold title to replacement property before a taxpayer finds a buyer for his relinquished property. Sometimes the exchange accommodation titleholder will take and hold title to the relinquished property until a buyer can be found for it. Reverse Exchanges of either type are useful in circumstances where a taxpayer needs to close on the purchase of replacement property before a relinquished property can be sold or where the taxpayer desires ample time to search for suitable replacement property before selling a relinquished property which starts 45 and 180-day clocks for Delayed Exchanges.

Reverse Exchanges are also common where a taxpayer wants to acquire a property and construct improvements on it before taking title to the property as replacement property for an exchange. This is necessary if the value of the improvements is important for replacing with property of equal or greater value in order to avoid a taxable "trade-down."

Rev. Proc. 2004-51 issued in 2004 added an additional requirement for Reverse Exchanges to be under the safe harbor "umbrella." Any property which has been previously owned by the taxpayer within the prior 180-days is now declared ineligible for protection under the Rev. Proc. 2000-37 safe harbor procedures.

The Safe Harbor Reverse Exchange Time Clocks. The safe harbor procedures impose compliance requirements which require analysis for impact and planning that can be summarized as follows

• The 5-Day Rule. A "Qualified Exchange Accommodation Agreement" must be entered into between the taxpayer and the exchange accommodation titleholder (qualified intermediary in most cases) within five business days after title to property is taken by the exchange accommodation titleholder in anticipation of a Reverse Exchange.
• The 45-Day Rule. The property to be "relinquished" (the relinquished property) must be identified within 45-days. More than one potential property to be sold can be identified in a manner similar to the rules of delayed exchanges (i.e., the three-property rule, the 200% rule, etc.)
• The 180-Day Rule. The Reverse Exchange must be completed within 180-days of taking title by the exchange accommodation titleholder.

The 180-Day Clock – As with Delayed Exchanges where the exchange must be completed within 180-days, Reverse Exchanges now must be completed within 180 days. In the past, since there was no statutory limitation of time in which to be in title, it has been common for the Exchange Accommodation Titleholder to be in title on the parked property for a year or more during which the taxpayer would find a buyer for his relinquished property or during which time the taxpayer would have improvements constructed on the property being held by the Titleholder.

180 days may be a suitable time for a buyer to be found for the relinquished property. But, 180 days is a problem with respect to construction/improvement exchanges. The 180-day time limit within which to complete a safe harbor Reverse Exchange is probably insufficient for most large "build to suit" exchanges.

What if the taxpayer has not yet found a buyer for his relinquished property by the end of 180-days? In this case, the taxpayer can discontinue his attempt to accomplish a Reverse Exchange and take deed to the replacement property. Or the taxpayer may decide to extend his Reverse Exchange outside of the protection of the safe harbor procedures. The safe harbor guidance issued by the IRS is optional, not mandatory. Reverse Exchanges that do not comply with the requirements of Rev. Proc. 2000-37 stand or fall on their own merits and should be considered to have a higher degree of audit risk now that guidelines have been issued for Safe Harbor Reverse Exchanges.

Rev. Proc. 2000-37 imposes responsibilities and burdens on the Exchange Accommodator Titleholder. The Accommodator is required to report for federal income tax purposes the "tax attributes" of ownership of the property it is in title on. It is possible that the Accommodator will be required to depreciate the property just as a true owner would be required to do; this remains unclear.

Rents and expenses attributed to ownership of the property may have to be reported by the Accommodator. There was no specific requirement requiring Accommodators to do this prior to Rev. Proc. 2000-37.

The Role Of The Qualified Intermediary

The role of the Qualified Intermediary is essential to completing a successful and valid delayed exchange. The Qualified Intermediary is the glue that puts the buyer and seller of property together into the form of a 1031 Exchange. Where such an intermediary (often called an exchange facilitator) is used, the intermediary will not be considered the agent of the taxpayer for constructive receipt purposes notwithstanding the fact that he may be an agent under state law and the taxpayer may gain immediate possession of the money or property under the laws of agency.

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