Reverse Exchanges

IRS Issues Long Awaited Reverse Exchange Rules

During the one-year period between the promulgation of the 1990 proposed exchange regulations and the issuance of the final regulations in April of 1991, the IRS solicited comments in regard to allowing pure reverse exchange transactions. A pure reverse exchange was understood to mean that the taxpayer would acquire the replacement property prior to the sale of the relinquished property. The final regulations ultimately failed to allow a safe harbor for such a reverse closing sequence.

Rev. Proc. 2000-37: Reverse Exchanges

Since the promulgation of the final regulations under § 1.1031(k)-1, taxpayers have engaged in a wide variety of transactions, including “parking” transactions, to facilitate reverse like-kind exchanges. Parking transactions typically are designed to “park” the desired replacement property with an accommodation party until such time as the taxpayer arranges for the transfer of the relinquished property to the ultimate transferee in a simultaneous or deferred exchange. Once such a transfer is arranged, the taxpayer transfers the relinquished property to the accommodation party in exchange for the replacement property, and the accommodation party then transfers the relinquished property to the ultimate transferee.

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