The vast majority of exchanges are forward exchanges, where the investor sells the current property owned, and then finds a new property to exchange. In these cases, the Intermediary receives the proceeds from the sale of the relinquished property and then purchases the replacement property with those funds (along with other funds from the investor) and then transfers the property to the investor.
There are some situations where an investor comes across a property that is just too good to pass up, and needs to tie up the purchase before someone else can purchase it. Rather than an intermediary holding the proceeds of the sale of the relinquished property, the Exchange Accommodation Titleholder holds title to the new property under a Qualified Exchange Accommodation Arrangement (QEAA). Under Rev. Proc. 2000-37, property is deemed to be properly held in a QEAA if all of the following requirements are met:
- Qualified indicia of ownership of the property (title) is held by a person or entity that is not the taxpayer or a disqualified person (the exchange accommodation titleholder).
- It must be the bona fide intent by the taxpayer that the property held by the exchange accommodation title holder represent the replacement or relinquished property for the exchange.
- No later than five business days after the transfer of title to the exchange accommodation holder, the taxpayer and the exchange accommodation titleholder enter into a written agreement that provides that the exchange accommodation titleholder is holding the property for the benefit of the taxpayer.
- No later than 45 days after the transfer of the title of the replacement property to the exchange accommodation titleholder, the taxpayer must identify the property or properties that are to be relinquished.
- No later than 180 days after the transfer of the replacement property to the exchange accommodation titleholder, a) the property is transferred( directly or indirectly through a qualified intermediary) to the taxpayer as replacement property or b) the property is transferred to a person who is not the taxpayer or a disqualified person as relinquished property.
- The combined period that the relinquished property and the replacement property are held in a QEAA does not exceed 180 days.
As you can see, this type of transaction is much more complex and calls for a great deal of planning. For more information regarding implementing a reverse exchange, give our office a call.