Facilitating a reverse exchange is necessary when the taxpayer has decided to purchase the replacement property prior to the sale of the relinquished property. According to the IRC Section §1031 regulations the taxpayer may not own both properties involved in the exchange simultaneously. There are two options to choose from when completing a reverse exchange.

A. The Qualified Intermediary (QI) would facilitate the reverse exchange by parking the replacement property in a specific purpose entity until the taxpayer sells their relinquished property.

The Warranty Deed would be placed in the parking company's name and if financing is necessary it is important to ensure the mortgage company is aware of this particular aspect of the transaction.

The steps in the Reverse exchange are as follows:

Prior to initiating the reverse exchange it is recommended that the taxpayer consult their accountant as to the suitability for their transaction.

If a mortgage is involved, the taxpayer will also need to verify with their mortgage company to see if they consent to the deed reflecting the specific purpose entity name not the taxpayer's name.

It will also be imperative that the taxpayers review the Deed to their Relinquish property (ies) to ensure that the entity on the sale and purchase will be the same.

Next, the QI will request a copy of the purchase contract with an addendum adding the name of the parking company as the purchaser. In addition, the QI will need the taxpayer's personal information closing agent name, phone and fax and estimated closing date. See Information Sheet.

The QI will then generate the appropriate contract and supply this to the taxpayer for review and signature. In addition, the QI will supply the closing agent with the appropriate information for preparation of the closing documents and the Deed.

Once closing takes place the taxpayer will have 45 days to designate the property (ies) they plan to sell and 180 days to close on said property (ies).

The next portion of the Reverse exchange will resemble the sequence under the delayed 1031 exchange except: There will not be an actual closing on the 2nd leg, but it will be necessary to have a Special Warranty Deed prepared (usually by the original closing agent) once the relinquished property is sold to transfer the replacement property from the special purpose entity to the taxpayer. The funds from the sale of the relinquished property (ies) will then be either applied to the mortgage or returned to the client depending on the breakdown of the funds used to purchase of the Replacement property.

B. The Qualified Intermediary (QI) would facilitate the reverse exchange by parking the relinquished property in a specific purpose entity until the property sells. Please contact the office for specifics on this type of reverse exchange as issues arise if the property is mortgaged.