Section 1031 Reverse Exchanges

A Section 1031 Reverse Exchange is appropriate when a client needs or desires to purchase replacement property before the property to be relinquished is sold.

In such situations, the IRS requires that an Exchange Accommodation Titleholder (EAT) temporarily take title to the property being purchased. Rattikin Exchange has formed a separate holding entity, Texas Reverse Exchange Holding Company, L.L.C., to act as the Exchange Accommodation Titleholder. Texas Reverse will hold the title until the client sells the property that is subject to the potential capital gains tax. The property must be sold within 180 days of closing on the replacement property.

The Reverse Exchange Process

In order to initiate a reverse exchange, the client desiring to complete the exchange must appoint an Exchange Accommodation Titleholder (EAT) and execute several instruments required to document the exchange, including:

  • Qualified Exchange Accommodation Agreement – This agreement outlines the parties’ rights and obligations and the nature of the exchange.
  • Assignment of Rights and Notification – Replacement Property – This agreement assigns the purchaser’s interest in the contract to the EAT and entitles the EAT to purchase property and obtain the title pending the sale of the relinquished property.
  • Reverse Exchange Waiver and Release – This form outlines the time deadlines and client obligations in the reverse exchange process.
  • Identification of Relinquished Property – This document identifies the property to be sold to complete the reverse exchange.

Typically the client will arrange for financing, either through a third party lender or through the seller, to facilitate the EAT’s purchase of the replacement property. The lender will normally require the following documents at closing:

  • Nonrecourse Real Estate Lien Note executed by the EAT;
  • Nonrecourse Deed of Trust executed by the EAT;
  • Guaranty Agreement executed by the client;
  • Lease Agreement or Management Agreement executed by the EAT and the client;
  • Settlement Statement executed by the EAT and approved by the client.

The reverse exchange procedures require the client to identify potential relinquished property to be sold to complete the exchange within 45 days from the transfer of the replacement property. Once the relinquished property has been identified. Rattikin Exchange, as the Qualified Intermediary, will close on the sale of the relinquished property and receive the net proceeds derived from the sale. The proceeds will then be used to purchase the replacement property from the EAT. The EAT will pay off any purchase money loans obtained to purchase the replacement property and, immediately thereafter, convey the replacement property to the client by Special Warranty Deed to complete the exchange.