A reverse exchange occurs when the replacement property is acquired prior to closing on the relinquished property.
There are valid reasons for an investor to consider a reverse exchange.
- In a seller’s market, there may be a need to secure an attractive property before someone else grabs it.
- Inventory may be scarce and therefore there is a need to move quickly.
- It just may be very practical if trying to relinquish multiple properties.
Listed below are the highlights of a reverse exchange.
- The qualified intermediary — through a “Qualified Exchange Accommodation Agreement” — may hold title to either the relinquished or replacement property.
- The investor must have the requisite intent that the purchase of the replacement property be part of an exchange.
- Within 45 days of purchasing the replacement property, the investor must “identify” the relinquished property to be sold in the exchange. The reverse exchange must be completed within 180 calendar days. The exchanger may advance or loan funds to the intermediary for the purchase of the replacement property. The exchanger may also supervise improvements, act as a contractor and/or assume other managerial functions. If there is financing involved, the lender should be consulted early since the intermediary must hold title to the property. It has been deemed permissible for the purchaser to enter into a lease or management agreement with the intermediary.
It is very critical to scrutinize the way the qualified intermediary holds title to the property. Consult your attorney in this regard.