A reverse exchange is the "flip side" of a deferred exchange, where an investor directly or indirectly acquires a like kind replacement property before disposing of a relinquished property. In a fast paced real estate market, owners of real property often face the prospect of losing the opportunity to acquire a desirable replacement property, when the seller of such property is unwilling or unable to wait while the investor completes the disposition of a relinquished property.
Beginning with the IRS' acceptance of deferred like-kind exchanges, taxpayers have engaged in a wide variety of transactions, including so-called "parking" or "warehousing" transactions, to facilitate reverse like-kind exchanges. Parking transactions typically are designed to "park" the desired replacement property with a qualified intermediary until such time as the taxpayer arranges for the transfer of the relinquished property to the ultimate buyer in a simultaneous or deferred exchange. Once such a transfer is arranged, the taxpayer transfers the relinquished property to the qualified intermediary in exchange for the replacement property, and the qualified intermediary then transfers the relinquished property to the ultimate buyer. In other situations, a qualified intermediary may acquire the desired replacement property on behalf of the taxpayer and immediately exchange such property with the taxpayer for the relinquished property, thereafter holding the relinquished property until the taxpayer arranges for a transfer of such property to the ultimate buyer. In parking arrangements, taxpayers attempt to arrange the transaction so that the qualified intermediary has enough of the benefits and burdens relating to the property so that the qualified intermediary will be treated as the owner for federal income tax purposes.
On October 2, 2000 the Internal Revenue Service ("IRS") issued Revenue Procedure 2000-37 providing long awaited guidance on structuring reverse exchanges to avoid IRS challenge. The Revenue Procedure describes a safe harbor for reverse exchanges if certain requirements are met.
Rev. Proc. 2000-37 provides that a reverse exchange will not be challenged if the taxpayer, who will be the ultimate owner of the parked property, satisfies two requirements: (i) the taxpayer enters a written Qualified Exchange Accommodation Arrangement ("QEAA"), and (ii) the taxpayer engages the services of an exchange accommodation titleholder ("EAT") which can be a qualified intermediary such as Like Kind Exchange Intermediary Corp.