Creating a “Safe Harbor”
SIMPLY PUT a reverse tax exchange typically occurs when the Replacement Property is acquired before the closing of the Relinquished Property. However, there are precise details that the IRS has outlined that regulate the process.
Three Key Elements
THE ACCOMODATING TITLE HOLDER is an important role in a Reverse exchange. The ATH is used to purchase the property on behalf of the Exchangor, and the title is held in the name of the ATH. This Accommodating Title Holder, however, must assume the “benefits and burdens” of the property in which they hold title. The regulations, however, do allow for the Exchangor to be directly involved in the maintenance, improvement, etc. of the property, through the Qualified Exchange Accommodation Agreement.
THE EXCHANGOR MUST HAVE ADEQUATE FUNDS or collateral available to fund this purchase by the Accommodating Title Holder. Because you don’t have the funds in hand that will be coming from the Relinquished property, you need to be able to provide other financial backing from elsewhere.
TIGHT TIMELINES can make this process difficult. The Qualified Exchange Accommodation agreement must be signed no later than 5 days after closing on the new property. Within 45 days of acquiring the “Parked Property” the Exchangor must declare the specific property they will sell as their Forward Exchange. The Exchangor must take title of Parked Property within 180 days of ATH taking title.
How Is The Exchangor Allowed To Be Involved With The Parked Property?
- PROVIDE FUNDS directly to the ATH to acquire the property.
- GUARANTEE ANY BORROWING by ATH to acquire the property.
- ENTER INTO AN AGREEMENT with ATH for Exchangor to manage the property.
- DIRECTLY LEASE the property from the ATH.
- SUPERVISE IMPROVEMENTS being made to the property during the time property is “parked”.
- ACT AS A CONTRACTOR in making repairs or improvements to the property.