Safe Harbor Reverse Exchanges

I addressed safe harbor reverse exchange structures in my blog post from yesterday.  I discussed the fact that a safe harbor reverse exchange will qualify for tax-deferred exchange treatment and will not be challenged by the IRS provided the safe harbor parking arrangements contained within Rev. Proc. 2000-37 are followed. 

Safe Harbor Provisions Only

Rev. Proc. 2000-37 merely provides certain safe harbor provisions that you can rely upon when structuring a reverse exchange transaction.  Safe harbor provisions essentially mean that the IRS will not challenge the transaction if you follow the safe harbor provisions. 

It is possible to structure a reverse exchange that falls outside of the safe harbor provisions and still qualify for tax-deferred exchange treatment.  The challenge is that since the transaction is structured outside of the safe harbor provisions or guidelines we may find outselves in uncharted territory because we have no guidance from the IRS.

Reverse Exchange Structure Must Be Decided Upfront

Reverse exchanges structured pursuant to Rev. Proc. 2000-37 must be structured very different from those that are structured using a non-safe-harbor structure, so you must decide up front if you will be able to follow the safe harbor guidelines or if you will most likely not be able to do so. 

Those reverse exchanges that can be completed within the required reverse exchange deadlines will be structured as safe harbor reverse exchanges, and those where it is obvious that the transaction will take significantly longer than the required 180 calendar day deadline under the safe-harbor provisions must be structured as non-safe harbor reverse exchanges from the very beginning. 

Real estate exchanges that will involve building or constructing building from the ground up are typical examples where the non-safe-harbor reverse exchange structure may be needed because the construction can take well over 18 to 24 months and be well outside of the standard reverse exchange deadlines. 

There is considerable risk that the IRS would disqualify your reverse exchange if you structure your reverse exchange under the safe harbor provisions and then change the structure toward the end of the 180 calendar day deadline. 

Non-Safe-Harbor Reverse Exchanges

Stay tuned for the structure and mechanics involved with a non-safe-harbor reverse exchange.