Buy Before You Sell
Reverse 1031 Exchanges
Found the perfect replacement property but haven't sold your current one yet? A reverse exchange lets you acquire it now and defer 100% of your capital gains taxes.
What Is a Reverse Exchange?
In a standard 1031 exchange, you sell your investment property first and then acquire a replacement property within 180 days. A reverse exchange flips that order — you acquire the replacement property first, before selling your relinquished property.
This is valuable when you find the ideal replacement property but cannot wait for your current property to sell. In competitive markets, the best properties move fast — and a reverse exchange ensures you never lose a great opportunity to timing.
Because IRS rules prohibit you from holding title to both the relinquished and replacement properties simultaneously, an Exchange Accommodation Titleholder (EAT) — a special-purpose entity established by your Qualified Intermediary — "parks" one of the properties until the exchange is complete. This parking arrangement is governed by the safe harbor guidelines of Revenue Procedure 2000-37.
How a Reverse Exchange Works
The most common structure is a "replacement property parking arrangement," where the EAT holds title to the replacement property while you sell your relinquished property.
Identify the Opportunity
You find the ideal replacement property but have not yet sold your relinquished property. Time is of the essence — you need to act before the property is sold to someone else.
Establish the EAT
An Exchange Accommodation Titleholder (EAT) — a special-purpose entity set up by your Qualified Intermediary — is created to "park" one of the two properties, since you cannot hold title to both simultaneously.
Acquire the Replacement
The EAT purchases and takes title to the replacement property using funds you provide (either your own cash or financing). The EAT holds the property in a parking arrangement until your relinquished property sells.
Identify the Relinquished
Within 45 days of the EAT acquiring the replacement property, you must formally identify the property you intend to sell (the relinquished property) in writing to your Qualified Intermediary.
Sell the Relinquished
Your relinquished property is sold. The proceeds are held by the QI in a dedicated FDIC-insured account and used to complete the exchange by reimbursing the EAT.
Complete the Exchange
Within 180 days of the EAT acquiring the replacement property, the relinquished property must close and the EAT transfers title to the replacement property to you. The exchange is complete with full tax deferral.
Reverse Exchange Requirements
To qualify for full tax deferral, a reverse exchange must satisfy the requirements of IRS Section 1031 and the safe harbor guidelines established by Revenue Procedure 2000-37:
- You cannot hold title to both the relinquished and replacement properties at the same time — the EAT must "park" one of them
- The replacement property must be identified (or acquired) and the relinquished property must be identified within 45 days
- The entire exchange must be completed within 180 days of the earliest acquisition date
- The replacement property must be of equal or greater value than the relinquished property for full tax deferral
- All net equity from the relinquished property sale must be reinvested into the replacement property
- Both properties must be "like-kind" — real property held for investment or business use
- The transaction must comply with the safe harbor guidelines of Revenue Procedure 2000-37
- You must have a bona fide intent to exchange at the time the EAT acquires the replacement property
Key Deadlines
Identification Period
Within 45 calendar days of the EAT acquiring the replacement property, you must formally identify the relinquished property (the property you intend to sell) in writing to your Qualified Intermediary.
Exchange Period
The entire exchange must be completed within 180 calendar days of the EAT acquiring the replacement property. Your relinquished property must close and the EAT must transfer title to the replacement property to you — all within this window.
Important: The 180-day deadline is absolute and cannot be extended. If your relinquished property does not close within this window, the exchange fails and the transaction is treated as a taxable purchase. This is why you should have a realistic plan to sell your relinquished property before starting a reverse exchange.
When to Choose a Reverse Exchange
Reverse exchanges are the right choice when the replacement property opportunity is time-sensitive and you cannot afford to wait for your relinquished property to sell first.
Buy Before You Sell
Acquire the perfect replacement property immediately, without waiting for your relinquished property to close. Never miss an opportunity due to timing.
No Simultaneous Close Risk
In a standard exchange, you must sell before you buy. A reverse exchange eliminates the risk of a failed or delayed sale on the front end jeopardizing your replacement.
Full Tax Deferral
When properly structured under Rev. Proc. 2000-37, a reverse exchange defers capital gains taxes just like a standard 1031 exchange.
Competitive Edge
In hot markets, sellers prefer buyers who can close quickly. A reverse exchange lets you make non-contingent offers and win deals other investors can't.
Reverse Exchange FAQs
What is a reverse 1031 exchange?
A reverse 1031 exchange is a type of 1031 exchange in which you acquire your replacement property before selling your relinquished property. This reverses the normal order of a 1031 exchange (where you sell first, then buy). Because IRS rules prohibit you from holding title to both properties simultaneously, an Exchange Accommodation Titleholder (EAT) established by your Qualified Intermediary "parks" one of the properties until the exchange is complete.
Why would I do a reverse exchange instead of a standard exchange?
A reverse exchange is ideal when you find the perfect replacement property but have not yet sold your current investment property. In competitive markets, waiting to sell first can mean losing the replacement property to another buyer. A reverse exchange lets you secure the replacement immediately and then sell your relinquished property within the 180-day window.
How does the "parking arrangement" work?
Because you cannot own both the relinquished and replacement properties at the same time, the Exchange Accommodation Titleholder (EAT) takes title to one of them — most commonly the replacement property. The EAT holds the property in a parking arrangement while you sell your relinquished property. Once the sale closes and the exchange funds are available, the EAT transfers title to you. The EAT is a special-purpose entity set up by your Qualified Intermediary specifically for this transaction.
What are the deadlines for a reverse exchange?
Under the safe harbor guidelines of Revenue Procedure 2000-37, you have 45 days to identify the relinquished property (the property you intend to sell) after the EAT acquires the replacement property, and 180 days to complete the entire exchange — meaning the relinquished property must be sold and title to the replacement property must be transferred to you, all within 180 days.
Do I need to use my own money to buy the replacement property first?
Yes. Because exchange proceeds from the relinquished property are not yet available (you have not sold it yet), you must fund the acquisition of the replacement property with your own cash or financing. After your relinquished property sells, the QI uses those proceeds to reimburse you or pay off the financing, completing the exchange.
Can the EAT park the relinquished property instead of the replacement?
Yes. There are two structures: a "replacement property parking arrangement" (the EAT holds the replacement property) and a "relinquished property parking arrangement" (the EAT holds the relinquished property after you sell it). The replacement property parking arrangement is more common, but the best structure depends on your specific situation. We will recommend the right approach during your consultation.
Are reverse exchanges more expensive than standard exchanges?
Yes. Reverse exchanges are more complex than standard deferred exchanges. They require an Exchange Accommodation Titleholder, additional legal documentation, and ongoing coordination. Fees are higher as a result. However, the cost is often worth it when the right replacement property is at stake. Contact us for a free consultation and quote.
What is Revenue Procedure 2000-37?
Revenue Procedure 2000-37 is the IRS guidance that established "safe harbor" rules for reverse exchanges. Following these safe harbors ensures the IRS will respect the parking arrangement and treat the transaction as a valid 1031 exchange. While it is possible to structure a reverse exchange outside the safe harbors, doing so adds risk. We structure all reverse exchanges to comply with Rev. Proc. 2000-37.
Considering a Reverse Exchange?
Reverse exchanges are complex and require precise structuring. Our attorney-led team has the expertise to set up the EAT, manage the parking arrangement, and ensure your exchange complies with Rev. Proc. 2000-37.