I addressed the issue of whether a true reverse exchange would qualify for tax-deferred exchange treatment in my blog post from yesterday. I discussed the fact that a true reverse exchange does not exist, but that a reverse exchange can be structured.
Reverse Exchange Pursuant to Revenue Procedure 2000-37
The IRS issued Revenue Procedure 2000-37 that allows a real estate investor to structure a parking arrangement whereby an Exchange Accommodation Titleholder can acquire and hold or "park" title to either the the real estate investor's relinquished property or replacement property in order to buy enough time to sell the existing relinquished property and structure a concurrent 1031 exchange and still defer the payment of their depreciation recapture and capital gain taxes.
Safe Harbor Provisions
Structuring a reverse exchange using Rev. Proc. 2000-37 is called a Safe Harbor Reverse Exchange because you are taking advantage of the safe harbor provisions provided by the IRS in the Revenue Procedure 2000-37. The IRS will not challenge your reverse exchange as long as you have followed the safe harbor provisions. It is for these reasons that most real estate investors comply with Rev. Proc. 2000-37 so that they can take advantage of the safe harbor provisions and not have to worry as to whether their reverse exchange would be challenged by the IRS.
Outside the Safe Harbor Provisions
You can structure a reverse exchange that is outside of the safe harbor guidelines or provisions provided by Rev. Proc. 2000-37. Rev. Proc. 2000-37 does not disqualify those reverse exchanges that are not structured within its safe harbor provisions, but the real estate investor can not take advantage of the safe harbor provisions either, so they are assuming some degree of risk should their reverse exchange come under audit.
Stay tuned for more thoughts regarding reverse exchanges.
Website for Additional Information
You can visit Exeter Reverse 1031 Exchange Services, LLC's website for more detailed and in depth information on reverse exchanges.
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