THE NEW
REVERSE EXCHANGE REVENUE
PROCEDURE 2000-37
BACKGROUND:
In a reverse exchange the replacement property is
acquired before the relinquished property is sold. In
most reverse exchanges an Accommodator will hold title
to the replacement property until the relinquished
property is sold.
The Internal Revenue Service did not address reverse
exchanges in the final regulations for IRC § 1031 tax
deferred exchanges issued in 1991. After years of
industry practices of structuring reverse exchanges the
IRS on September 15, 2000 issued Revenue Procedure
2000-37. This new procedure provides a safe harbor for
taxpayers in structuring a reverse tax-deferred
exchange.
Six requirements must be met to provide a safe harbor
under Rev. Proc 2000-37
1) Ownership. The parked property must be owned
by an Exchange Accommodation Title holder who is NOT the
taxpayer or disqualified person. The Accommodation Title
holder (Accommodator) must be a taxpaying entity.
2) Intent. The taxpayer must have a bona fide
intent that the parked property held by the Accommodator
be used as part of a tax deferred exchange.
3) Required Contract Provisions. The Accommodator
and Taxpayer must enter into a written agreement
providing that the Accommodator is holding the property
for the benefit of the taxpayer in order to facilitate a
1031 Tax Deferred Exchange. The agreement must also
provide that the Accommodator be treated as the owner of
the parked property for federal income tax purchases and
both parties will report the transaction consistent with
the agreement. The agreement must be entered into no
later that five business days after the parked property
has been acquired by the Accommodator.
4) Identification Requirement. The relinquished
property must be identified within 45 days after the
Accommodator acquires title to the parked replacement
property.
5) Receipt Requirement. Within 180 days after the
Accommodator acquires title to the parked property, the
property must be transferred to the taxpayer as the
replacement property or to a buyer as relinquished
property in a tax deferred exchange.
6) Total Holding Period. The combined period that
the Accommodator holds any parked property (relinquished
or replacement) cannot exceed 180 days.
Permissible Agreements
Rev. Proc. 2000-37 approves seven different types of
legal relationships or contractual arrangements.
1) Titleholder as Qualified Intermediary. The
Accommodator who holds title to the parked property may
also serve as the Qualified Intermediary.
2) Guaranty Arrangements. The taxpayer may
guarantee the obligations of the Accommodator to
purchase the parked property. The taxpayer may also
indemnify the Accommodator against costs and expenses.
3) Leasing Arrangements. The parked property can
be leased to the taxpayer from the Accommodator.
4) Loans. The taxpayer may loans funds to the
Accommodator or guarantee a loan to the Accommodator.
5) Taxpayer as Contractor/Manager. The taxpayer
can manage the parked property or act as a contractor or
supervisor to improve the parked property. A taxpayer
should not receive a profit if they acting as contractor
as it could be seen as a violation of G6 rules. The G6
rules provide that a taxpayer cannot withdraw funds held
by an Accommodator until the exchange is complete.
6) Purchase Agreements. The taxpayer and the
Accommodator may enter into agreements relating to the
purchase or sale of the parked property as long as they
are for a period of not more than 185 days from the date
the parked property is transferred to the Accommodator.
Purchase Agreements can be at a fixed or formula prices.
7) Parking the Relinquished Property. The
taxpayer and Accommodator may enter an agreement
providing that any variation in the value of a
relinquished property from the estimate value on the
date the Accommodator acquires the property be taken
into account upon the Accommodator’s disposition of the
relinquished property through the taxpayer’s advance of
funds to or receipt of funds from the Accommodator.