Reverse Exchange Frequently Asked Questions

1. What are the requirements of a QEAA?
2. What are the Requirements of an EAT?
3. What kind of Arrangements are Permissible?





1. What are the requirements of a QEAA?

Property will be considered to be held in a QEAA if all of the following requirements are met:

(a) The property is titled in the name of the EAT or its subsidiary. The Rev. Proc. requires that "qualified indicia of ownership" of the property is held by the EAT. This requirement is met by either (i) deeding the property directly to the qualified intermediary or (ii) deeding the property to a single-member limited liability company owned by the EAT. When effectuating a reverse exchange under the safe harbor, All States forms a single-member LLC to hold the replacement property so as to protect the taxpayer from any liabilities arising from any of the other properties held by All States, and to protect All States from any liabilities arising from the replacement property;

(b) The taxpayer has the requisite intent. The taxpayer must have a bona fide intent that the property held by the EAT represent either replacement property or relinquished property in an exchange that is intended to qualify for non-recognition of gain (in whole or in part) or loss under section 1031;

(c) The parties enter into a written QEAA in a timely manner. No later than five business days after the transfer of qualified indicia of ownership of the property to the EAT, the taxpayer and the EAT enter into a written QEAA that provides that the EAT is holding the property for the benefit of the taxpayer in order to facilitate an exchange under section 1031 and the Rev. Proc. and that the taxpayer and the EAT agree to report the acquisition, holding, and disposition of the property as provided in the Rev. Proc. The agreement must specify that the EAT will be treated as the beneficial owner of the property for all federal income tax purposes. Both parties must report the federal income tax attributes of the property on their federal income tax returns in a manner consistent with the QEAA;

(d) 45 Day Requirement. The relinquished property must be identified within 45 days. Similar to forward deferred exchanges, the taxpayer may properly identify alternative and multiple properties;

(e) 180 Day Requirement. The exchange must close within 180 days after the transfer of qualified indicia of ownership of the property to the EAT; and

(f) Combined Time Requirement. The combined time period that the relinquished property and the replacement property are held in a QEAA does not exceed 180 days.


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2. What are the Requirements of an EAT?

(a) The EAT cannot be a disqualified person. The Rev. Proc. cross references the regulations applicable to deferred exchanges, which eliminates the usual suspects of the taxpayer's attorney, accountant, investment banker, broker, etc. as a potential EAT.

(b) Federal income tax. The EAT must be subject to federal income tax or, if the EAT is treated as a partnership or S corporation for federal income tax purposes, more than 90 percent of its interests or stock are owned by partners or shareholders who are subject to federal income tax.


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3. What kind of Arrangements are Permissible

In addition to setting forth the requirements necessary to fall within the safe harbor, the Rev. Proc. listed permissible agreements that should provide most taxpayers and qualified intermediaries with the level of comfort necessary to effectuate a reverse exchange. A few of the more important types of permissible agreements are:

(a) Loans. The taxpayer may loan funds to the EAT or guarantee a loan to the EAT on non arm's length terms.

(b) Leasing. The parked property may be leased to the taxpayer at non fair market rates. For example, the lease amount might be set at an amount equal to any loan payments against the parked property plus all other costs of holding the parked property.

(c) Construction. The taxpayer can manage or act as general contractor to improve the parked property, though the taxpayer should avoid realizing a profit from his role as general contractor as that may violate the exchange regulations.



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