A reverse exchange occurs when a Taxpayer wants to acquire replacement property prior to the disposition and sale of the relinquished property. Although common terminology calls this type of transaction a "reverse exchange," the Taxpayer (also referred to as the "Exchangor") does not actually acquire the replacement property first and dispose of the relinquished property later. Instead, the Taxpayer must arrange for an Exchange Accommodation Titleholder (or "EAT") to take title to the replacement property.
In a reverse exchange, the EAT acquires title to the replacement property. It is important to note that a reverse exchange must be set up and structured with an EAT prior to the replacement property closing.
An improvement exchange occurs when the Taxpayer wants to acquire replacement property and build improvements on it during the exchange period. This usually occurs when the Taxpayer determines that he will have exchange funds in excess of the cost of the replacement property. The excess equity is used to construct improvements on the replacement property.