Reverse & Build-to-Suit Exchanges

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.

• The EAT acquires title to the replacement property at the scheduled closing. The acquisition is funded by the Taxpayer and/or a third party lender.


• The EAT leases the replacement property to the Taxpayer, and the lease provides that the Taxpayer receives all of the income and pays all of the expenses of the replacement property.


• Once a third party buyer is found for the relinquished property, the relinquished property is transferred to the buyer and the relinquished property proceeds are transferred to the Qualified Intermediary.


• After the relinquished property has been transferred to the buyer, the Taxpayer acquires the replacement property held by the EAT using the exchange funds (the net proceeds from the sale of the relinquished property). If there are remaining exchange funds, theTaxpayer may acquire additional replacement properties as part of a new delayed exchange, provided that they were properly identified.

Reverse Exchange Requirements

• Most rules that apply to tax-deferred exchanges also apply to reverse exchanges.


• The Taxpayer has 45 days from the first closing to identify the relinquished property(ies). The timeframes begin on the day the EAT takes title to the replacement property.


• Reverse exchanges under the IRS safe harbor rules must be completed within 180 days.


• All of these transactions must be set up as an exchange, rather than as a sale followed by a purchase.


• The Taxpayer must comply with Revenue Procedure 2000-37 (Rev Proc 2000-37) to satisfy a safe harbor reverse exchange.

Improvement/Build To Suit Exchange

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.

• Within 45 days after the relinquished property is transferred to the buyer, the Taxpayer must identify the replacement property including the improvements that will be constructed on the property.


• The acquisition of the replacement property, and all identified improvements, must be completed within 180 days.Nevertheless, the only property that is considered "like-kind" for exchange purposes will be property that is considered to be real property, i.e., attached to the land or building.


• In an improvement exchange, the EAT holdstitle to the replacement property, but the construction may be managed by the Taxpayer.