Academic journal article Journal of Accountancy

Reverse Exchanges Come of Age

Academic journal article Journal of Accountancy

Reverse Exchanges Come of Age

Article excerpt


* PAST PROBLEMS WITH CERTAIN SECTION 1031 exchanges had led to the development of the reverse or "parking" exchange in which a third-party "warehouses" the new property until the taxpayer sells the existing property. Although the IRS didn't attack parking exchanges, questions about their validity remained unanswered until revenue procedure 2000-37.

* WITH ITS ISSUANCE OF REVENUE PROCEDURE 2000-37, the IRS ended a long debate and endorsed "reverse" exchanges on real estate and other investment assets. The rules established a safe harbor for these types of IRC section 1031 exchanges and offered guidance to CPAs on how to execute them.

* THERE ARE TWO WAYS TO STRUCTURE A PARKING exchange. The most common is the "exchange last" technique in which the parking entity buys the desired replacement property first and sells it to the taxpayer later. Under the less common "exchange first" technique, the taxpayer temporarily parks the property to be relinquished with the warehousing entity and then buys the replacement property.

* THE IRS GUIDANCE CREATED NEW TERMINOLOGY, offered specific requirements and approved a number of steps in a successful parking exchange. To be covered under the safe harbor, an exchange must include a number of written elements and be completed within 180 days to receive automatic protection.

* REVENUE PROCEDURE 2000-37 ALSO ANSWERED SOME lingering questions about the burdens and benefits of ownership and settled agency issues that had long troubled CPAs. The IRS specifically said the entity performing the parking service may be the same entity that performs the qualified intermediary function.

The IRS approves a parking exchange technique.

The long-standing debate is over. With the advent of revenue procedure 2000-37, the IRS has finally endorsed what are commonly called "reverse" exchanges on real estate and other investment property. Effective September 15, 2000, this pronouncement established a safe harbor for these types of IRC section 1031 tax-deferred exchanges and provided a relatively clear road map for CPAs to help clients execute them safely.

Real estate investors have long recognized the benefits of section 1031 exchanges, which include postponing the tax due on the transfer until the taxpayer sells the replacement property. Most exchanges today are done on a delayed basis, meaning the sale of the existing property and the acquisition of a new one take place at different times. Under a reverse or "parking" exchange, an unrelated third party (sometimes called a parking entity or qualified intermediary) acquires and "warehouses" the replacement property until the investor sells the original property and is free to purchase the parked property from the third party. Reverse exchanges have no special tax benefits; they simply offer taxpayers a transaction option they might otherwise lose because of timing. (For a primer on deferred exchanges, see "Beyond Section 1031," JofA, Jul.00, page 61.) With the IRS signaling its desire that parking exchanges be clearly documented, executed and reported, it's important that CPAs understand the new rules found in revenue procedure 2000-37.


Although delayed exchanges are more popular, simultaneous exchanges are still done on rare occasions if all the steps fall into place. With the delayed method, a taxpayer first sells the so-called relinquished property and then acquires a replacement property within 180 days. A qualified intermediary does the required paperwork and holds the sale proceeds. Although the IRC does not specifically mention this forward order, it certainly is implied. The expanded section 1.1031 regulations the Treasury Department issued in 1991 neither endorsed nor condemned reverse exchanges; rather, the prelude simply stated the regulations did not apply to reverse exchanges, with no further comment. …

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