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  • Exchange Authority Successfully Implements Exchange Manager Pro(SM)

    DENVER, CO, February 15, 2022 – Exchange Authority, a subsidiary of Fidelity Bank in Leominster, MA, became the first Qualified Intermediary (QI) to implement Exchange Manager ProSM to facilitate their 1031 exchange business. Exchange Manager ProSM, a patented SaaS offering, hosted on Microsoft Azure, provides 24/7 secure, online access to all 1031 exchange data, documents, and reports. It allows for single-entry data to auto-generate required exchange agreements, assignments, and notifications.
    Exchange Authority’s President and CEO, John Peculis, confirmed that Exchange Manager ProSM has offered his team a one-stop-shop for 1031 exchanges, from document creation, automated communication, calendar reminders, and status tracking throughout the entire exchange process. “Exchange Manager ProSM is a solution made for QIs, by a QI that truly understands the technical side of 1031 Exchanges and therefore provides a true solution,” stated John.
    Exchange Authority is seeing a significant reduction in the calls and emails their specialists must manage daily due to Exchange Manager ProSM providing their team a real-time dashboard of the exchange status and automated updates to the client. “After internal analysis, we expect to decrease the time spent on tedious, back-and-forth communication by 30-50% with Exchange Manager ProSM,” adds John.
    “Exchange Manager ProSM is an out-of-the-box solution for all Qualified Intermediaries that are looking to increase efficiencies, security, and volume, without increasing staff,” said Brent Abrahm, Accruit’s President and CEO. “We are excited about the impact this technology is having on the entire real estate industry.  Automating routine, repetitive processes through Exchange Manager ProSM is allowing QIs to focus on creating a much greater customer experience.” 
     
    About Exchange Manager Pro SM
    Exchange Manager ProSM by Accruit is a proprietary, online software application that makes administering 1031 exchanges safe, secure, and simple. Exchange Manager ProSM was designed to ease the administrative burdens related to like-kind exchanges and automate routine functions of Qualified Intermediaries including: online client onboarding, document creation and distribution, and automatic deadline reminders and notifications.
    About Exchange Authority
    Exchange Authority has been assisting clients and their professional advisors throughout the United States on exchange matters and acting as a Qualified Intermediary since Congress adopted the exchange safe harbor regulations in 1991. As a Qualified Intermediary,  Exchange Authority advises and educates their clients on the process, creates all required documents, coordinates the exchange of funds, and provides full reports at the end of the exchange. In 2008, Exchange Authority was acquired by Fidelity Cooperative Bank, making it a wholly-owned subsidiary of the bank. Learn more about

  • Are 1031 Reverse Tax Deferred Exchanges of Real Estate Approved by the IRS?

    While Reverse Exchanges have been safe-guarded since 2000 there is still much confusion in the marketplace as to whether or not they are approved by the IRS. Let’s revisit the article below in which we cover frequently asked questions about Reverse Exchanges and discuss the history and evolution of them.  
    Real estate owners often receive conflicting advice about whether reverse tax deferred exchanges are legitimate tax strategies pre-approved as to structure by the IRS.  In fact, reverse tax deferred exchanges have a long history and continue to be a valuable tool for owners of real estate who hold property for investment or business purposes. Here are some of the questions that frequently come up and speak to the evolution of how reverse exchanges of real estate came to be approved. We’ll close this post with a look at the two approved structures in place today.
    What is a 1031 Reverse Exchange?
    A reverse exchange refers to the sequence of a taxpayer’s sale of relinquished property and the purchase of replacement property.  When circumstances require a taxpayer to acquire replacement property prior to the sale of relinquished property, that situation is known generally as a “reverse exchange” fact pattern.  Without further planning, the taxpayer’s direct purchase of the replacement property prior to the sale of the relinquished property, sometimes referred to as a “pure reverse” exchange is not approved by the IRS.  The ability to do a reverse exchange requires a taxpayer to structure the transaction in a manner providing for the taxpayer to sell the relinquished property before acquiring the replacement property.  In fact, the use of the term “reverse exchange” is a bit of a misnomer since the solution to deal with a reverse exchange fact pattern requires the sequence of sale and purchase to be accomplished with non-reverse timing.  There are a couple of ways that this can be accomplished.
    Do the Internal Revenue Service Regulations: IRC§1031 Allow for Reverse Exchanges?
    Not specifically. After the landmark legal decision in the Starker case and the 1991 Treasury Regulations that followed, exchanges became a lot easier to complete and therefore much more popular than before.  For the same reasons, the desire for taxpayers to complete reverse exchanges became much more popular at the same time.  In fact, during the comment period between May of 1990 and April of 1991 regarding the proposed regulations governing conventional forward exchanges (see Internal Revenue Service Regulations: IRC§1031), many persons requested the IRS to include guidelines for completing a reverse exchange at the same time.  In the preamble to those final regulations, however, the Treasury Department declined to do so stating: 

    “After reviewing the comments and the applicable law, the Service has determined that the deferred exchange rules of Section 1031(a)(3) do not apply to reverse-Starker transactions… however the Service will continue to study the applicability of the general rule of 1031(a)(1) to these transactions.”

    Does the IRS Revenue Procedure 2000-37 Allow for Reverse Exchanges?
    Yes. During the period from 1991 through 2000, many professional advisors structured reverse exchanges without the benefit of a “safe harbor” set forth by the IRS.  Fortunately, this uncertainty became clarified in September of 2000 with the issuance of Revenue Procedure 2000-37 (Rev. Proc.).  Basically, the Rev. Proc. suggested that an accommodating party could acquire the replacement property on behalf of the taxpayer and hold it for up to 180 days (shorter in some cases) allowing the taxpayer time to sell the relinquished property and immediately acquire the replacement property from the accommodating party.  Alternatively, the taxpayer could arrange for an accommodating party to acquire the relinquished property from the taxpayer, allowing the taxpayer to immediately acquire the replacement property…provided however, that the taxpayer found a bona fide buyer to acquire the property from the accommodator within 180 days (shorter in some cases).  Either of these steps would allow the taxpayer to effectively acquire the new property prior to the sale of the old property through an IRS approved reverse exchange structure. 
    What is an EAT in a Reverse Exchange?
    The Rev. Proc. referred to the accommodating party as an “Exchange Accommodation Titleholder”, which is currently often referred to as an “EAT”.  There are many companies that provide conventional forward exchange services (as a qualified intermediary) and a more limited number of those companies are also set up to provide EAT services.  The practice of holding title to a property on behalf of a taxpayer is often referred to as “parking” title to the property with the EAT.  For the mutual benefit of the taxpayer and the EAT, it is customary for the EAT to take title to the property using a special purpose entity, usually a limited liability company (“LLC”).  This insulates each separate client’s reverse exchange that is being facilitated by the EAT from other clients’ transactions and from the affairs of the exchange company acting as the member of the EAT.
    Today’s IRS Approved Reverse Exchange Structures
    1. Parking the Replacement Property
    The reverse exchange Rev. Proc. requires the taxpayer and EAT to enter into an overarching document referred to as a Qualified Exchange Accommodation Agreement (“QEAA”) describing the transaction, the relationship between the parties and reciting certain required terms. 

    Usually the taxpayer will already be under contract with the buyer prior to contacting the EAT in regard to the reverse exchange.  To shift the purchase over to the EAT, there is a simple assignment document assigning the purchase contract from the taxpayer to the EAT (Note that this assignment should not be confused with the assignment of rights to the Qualified Intermediary that takes place in a forward exchange.).
    The property acquisition financing on behalf of the EAT is either provided by the taxpayer or the taxpayer’s relationship lender, or a combination of both.  It is customary for the EAT to issue a Note and some kind of security interest such as a mortgage or a pledge of the membership interest in the limited liability company to the lender(s). 
    To avoid dealing with any property tenants, the EAT will typically enter into a Master Lease with the taxpayer so that the taxpayer can act as lessor in relation to the tenants.  This also puts the rental income into the taxpayers hand and not in the hands of the EAT.  The EAT simply wants to receive its fee.  The Rev. Proc. does not require the lease or loan to be arm’s length. 
    In addition to the QEAA, the parties typically enter into some kind of contract providing for the transfer of the property, or the membership in the LLC, to the taxpayer.  This takes place immediately after the taxpayer’s sale of the relinquished property. 
    Last, depending upon the type of property being parked, there is typically a Phase One environmental report or simply an environmental indemnification agreement between the parties. 

    To recap, the applicable documents generally are as follows:

    Qualified Exchange Accommodation Agreement
    Assignment of Purchase Contract
    Non-Recourse Promissory Note
    Mortgage, Deed of Trust or Pledge Agreement of Membership Interest
    Master Lease
    Limited Liability Company Sale Agreement
    Environmental Indemnity Agreement

    Final Step:  Entering into a reverse exchange with an EAT does not remove the necessity of doing a conventional forward exchange of the relinquished property for the replacement property.  Rather, it buys the taxpayer time to sell the relinquished property by arranging for the EAT to acquire the replacement property from the seller and to park it. The proceeds from the sale of the relinquished property are used to acquire the property from the EAT and the EAT uses those funds to pay back any prior loans made to the EAT for the original acquisition of the replacement property.
    A reverse exchange parking the replacement property combined with a forward exchange looks something like the following:

    2. Parking the Relinquished Property
    Parking the relinquished property entails similar documentation to that of a replacement property parking arrangement.  Conceptually, this arrangement is no different than a white knight showing up on the taxpayer’s doorstep to buy her property on the eve of the replacement property acquisition. 

    Per the Rev. Proc. an overarching agreement must be entered into between the taxpayer and the EAT known as the QEAA. 
    There will be a contract between the taxpayer and the EAT providing for the EAT’s purchase of the relinquished property. 
    Generally if that property has debt on it, the EAT can acquire the property subject to the debt allowing for the property to be purchased for the amount of the taxpayer’s equity.  That equity amount can be acquired through a bank loan or a direct loan from the taxpayer to the EAT.  Any amount lent to the EAT will be used immediately by the EAT to acquire the property and the amount of equity paid goes into the taxpayer’s forward exchange account. 
    There is a Note and a security instrument reflecting the amount lent to the EAT.
    A Master Lease allows for the taxpayer to deal directly with the tenants. 
    Depending upon the type of property, there may be a requirement for a Phase One Environmental Audit or an environment indemnity agreement.
    Last, there may be some type of surety document which will provide for the taxpayer to be responsible for the representations and warranties made to the ultimate buyer of the relinquished property upon sale to that party by the EAT.  
    When the relinquished property is sold by the EAT to a permanent buyer, the funds received by the EAT are used to pay back any loans originally made to the EAT as well as any debt that the EAT acquired the property subject to. 

    To park the relinquished property, the applicable documents generally are as follows:

    Qualified Exchange Accommodation Agreement
    Agreement for the Purchase of the Relinquished Property
    Non-Recourse Promissory Note
    Mortgage, Deed of Trust or Pledge Agreement of Membership Interest
    Master Lease
    Environmental Indemnity Agreement
    Surety Instrument

    Final Step:  Entering into a reverse exchange with an EAT does not remove the necessity of doing a conventional forward exchange of the relinquished property for the replacement property.  Rather, it buys the taxpayer time to sell the relinquished property by transferring that property to the EAT, thereby triggering a sale of that property, allowing the taxpayer to acquire the replacement property on a non-reverse basis and taking up to six months (shorter in some cases) to find a permanent buyer.
    A reverse exchange parking the relinquished property combined with a forward exchange looks something like the following:

    Determining which Property to Park
    When parking the replacement property the amount needed to acquire that property is a sum certain.  However, when parking the relinquished property, it is often sold by the taxpayer to the EAT for a best guess of value.  Inevitably, the actual amount later received by a permanent buyer will deviate up or down.  So, when parking the relinquished property adjustments have to be made to deal with these deviations.  So all things being equal, usually the replacement property gets parked.  There are some factors which, when present, may suggest parking the relinquished property to be advantageous:

    The value of the relinquished property is much less than the replacement property so that the loan to the EAT is easy to attain
    The replacement property may involve special financing such as a Tax Increment Financing (TIF) or a Small Business Administration (SBA) loan which requires the taxpayer to be the borrower
    The replacement property may have some environmental issues which might involve some remediation of the issue

    Updated 2.15.2022.

  • Are 1031 Reverse Tax Deferred Exchanges of Real Estate Approved by the IRS?

    While Reverse Exchanges have been safe-guarded since 2000 there is still much confusion in the marketplace as to whether or not they are approved by the IRS. Let’s revisit the article below in which we cover frequently asked questions about Reverse Exchanges and discuss the history and evolution of them.  
    Real estate owners often receive conflicting advice about whether reverse tax deferred exchanges are legitimate tax strategies pre-approved as to structure by the IRS.  In fact, reverse tax deferred exchanges have a long history and continue to be a valuable tool for owners of real estate who hold property for investment or business purposes. Here are some of the questions that frequently come up and speak to the evolution of how reverse exchanges of real estate came to be approved. We’ll close this post with a look at the two approved structures in place today.
    What is a 1031 Reverse Exchange?
    A reverse exchange refers to the sequence of a taxpayer’s sale of relinquished property and the purchase of replacement property.  When circumstances require a taxpayer to acquire replacement property prior to the sale of relinquished property, that situation is known generally as a “reverse exchange” fact pattern.  Without further planning, the taxpayer’s direct purchase of the replacement property prior to the sale of the relinquished property, sometimes referred to as a “pure reverse” exchange is not approved by the IRS.  The ability to do a reverse exchange requires a taxpayer to structure the transaction in a manner providing for the taxpayer to sell the relinquished property before acquiring the replacement property.  In fact, the use of the term “reverse exchange” is a bit of a misnomer since the solution to deal with a reverse exchange fact pattern requires the sequence of sale and purchase to be accomplished with non-reverse timing.  There are a couple of ways that this can be accomplished.
    Do the Internal Revenue Service Regulations: IRC§1031 Allow for Reverse Exchanges?
    Not specifically. After the landmark legal decision in the Starker case and the 1991 Treasury Regulations that followed, exchanges became a lot easier to complete and therefore much more popular than before.  For the same reasons, the desire for taxpayers to complete reverse exchanges became much more popular at the same time.  In fact, during the comment period between May of 1990 and April of 1991 regarding the proposed regulations governing conventional forward exchanges (see Internal Revenue Service Regulations: IRC§1031), many persons requested the IRS to include guidelines for completing a reverse exchange at the same time.  In the preamble to those final regulations, however, the Treasury Department declined to do so stating: 

    “After reviewing the comments and the applicable law, the Service has determined that the deferred exchange rules of Section 1031(a)(3) do not apply to reverse-Starker transactions… however the Service will continue to study the applicability of the general rule of 1031(a)(1) to these transactions.”

    Does the IRS Revenue Procedure 2000-37 Allow for Reverse Exchanges?
    Yes. During the period from 1991 through 2000, many professional advisors structured reverse exchanges without the benefit of a “safe harbor” set forth by the IRS.  Fortunately, this uncertainty became clarified in September of 2000 with the issuance of Revenue Procedure 2000-37 (Rev. Proc.).  Basically, the Rev. Proc. suggested that an accommodating party could acquire the replacement property on behalf of the taxpayer and hold it for up to 180 days (shorter in some cases) allowing the taxpayer time to sell the relinquished property and immediately acquire the replacement property from the accommodating party.  Alternatively, the taxpayer could arrange for an accommodating party to acquire the relinquished property from the taxpayer, allowing the taxpayer to immediately acquire the replacement property…provided however, that the taxpayer found a bona fide buyer to acquire the property from the accommodator within 180 days (shorter in some cases).  Either of these steps would allow the taxpayer to effectively acquire the new property prior to the sale of the old property through an IRS approved reverse exchange structure. 
    What is an EAT in a Reverse Exchange?
    The Rev. Proc. referred to the accommodating party as an “Exchange Accommodation Titleholder”, which is currently often referred to as an “EAT”.  There are many companies that provide conventional forward exchange services (as a qualified intermediary) and a more limited number of those companies are also set up to provide EAT services.  The practice of holding title to a property on behalf of a taxpayer is often referred to as “parking” title to the property with the EAT.  For the mutual benefit of the taxpayer and the EAT, it is customary for the EAT to take title to the property using a special purpose entity, usually a limited liability company (“LLC”).  This insulates each separate client’s reverse exchange that is being facilitated by the EAT from other clients’ transactions and from the affairs of the exchange company acting as the member of the EAT.
    Today’s IRS Approved Reverse Exchange Structures
    1. Parking the Replacement Property
    The reverse exchange Rev. Proc. requires the taxpayer and EAT to enter into an overarching document referred to as a Qualified Exchange Accommodation Agreement (“QEAA”) describing the transaction, the relationship between the parties and reciting certain required terms. 

    Usually the taxpayer will already be under contract with the buyer prior to contacting the EAT in regard to the reverse exchange.  To shift the purchase over to the EAT, there is a simple assignment document assigning the purchase contract from the taxpayer to the EAT (Note that this assignment should not be confused with the assignment of rights to the Qualified Intermediary that takes place in a forward exchange.).
    The property acquisition financing on behalf of the EAT is either provided by the taxpayer or the taxpayer’s relationship lender, or a combination of both.  It is customary for the EAT to issue a Note and some kind of security interest such as a mortgage or a pledge of the membership interest in the limited liability company to the lender(s). 
    To avoid dealing with any property tenants, the EAT will typically enter into a Master Lease with the taxpayer so that the taxpayer can act as lessor in relation to the tenants.  This also puts the rental income into the taxpayers hand and not in the hands of the EAT.  The EAT simply wants to receive its fee.  The Rev. Proc. does not require the lease or loan to be arm’s length. 
    In addition to the QEAA, the parties typically enter into some kind of contract providing for the transfer of the property, or the membership in the LLC, to the taxpayer.  This takes place immediately after the taxpayer’s sale of the relinquished property. 
    Last, depending upon the type of property being parked, there is typically a Phase One environmental report or simply an environmental indemnification agreement between the parties. 

    To recap, the applicable documents generally are as follows:

    Qualified Exchange Accommodation Agreement
    Assignment of Purchase Contract
    Non-Recourse Promissory Note
    Mortgage, Deed of Trust or Pledge Agreement of Membership Interest
    Master Lease
    Limited Liability Company Sale Agreement
    Environmental Indemnity Agreement

    Final Step:  Entering into a reverse exchange with an EAT does not remove the necessity of doing a conventional forward exchange of the relinquished property for the replacement property.  Rather, it buys the taxpayer time to sell the relinquished property by arranging for the EAT to acquire the replacement property from the seller and to park it. The proceeds from the sale of the relinquished property are used to acquire the property from the EAT and the EAT uses those funds to pay back any prior loans made to the EAT for the original acquisition of the replacement property.
    A reverse exchange parking the replacement property combined with a forward exchange looks something like the following:

    2. Parking the Relinquished Property
    Parking the relinquished property entails similar documentation to that of a replacement property parking arrangement.  Conceptually, this arrangement is no different than a white knight showing up on the taxpayer’s doorstep to buy her property on the eve of the replacement property acquisition. 

    Per the Rev. Proc. an overarching agreement must be entered into between the taxpayer and the EAT known as the QEAA. 
    There will be a contract between the taxpayer and the EAT providing for the EAT’s purchase of the relinquished property. 
    Generally if that property has debt on it, the EAT can acquire the property subject to the debt allowing for the property to be purchased for the amount of the taxpayer’s equity.  That equity amount can be acquired through a bank loan or a direct loan from the taxpayer to the EAT.  Any amount lent to the EAT will be used immediately by the EAT to acquire the property and the amount of equity paid goes into the taxpayer’s forward exchange account. 
    There is a Note and a security instrument reflecting the amount lent to the EAT.
    A Master Lease allows for the taxpayer to deal directly with the tenants. 
    Depending upon the type of property, there may be a requirement for a Phase One Environmental Audit or an environment indemnity agreement.
    Last, there may be some type of surety document which will provide for the taxpayer to be responsible for the representations and warranties made to the ultimate buyer of the relinquished property upon sale to that party by the EAT.  
    When the relinquished property is sold by the EAT to a permanent buyer, the funds received by the EAT are used to pay back any loans originally made to the EAT as well as any debt that the EAT acquired the property subject to. 

    To park the relinquished property, the applicable documents generally are as follows:

    Qualified Exchange Accommodation Agreement
    Agreement for the Purchase of the Relinquished Property
    Non-Recourse Promissory Note
    Mortgage, Deed of Trust or Pledge Agreement of Membership Interest
    Master Lease
    Environmental Indemnity Agreement
    Surety Instrument

    Final Step:  Entering into a reverse exchange with an EAT does not remove the necessity of doing a conventional forward exchange of the relinquished property for the replacement property.  Rather, it buys the taxpayer time to sell the relinquished property by transferring that property to the EAT, thereby triggering a sale of that property, allowing the taxpayer to acquire the replacement property on a non-reverse basis and taking up to six months (shorter in some cases) to find a permanent buyer.
    A reverse exchange parking the relinquished property combined with a forward exchange looks something like the following:

    Determining which Property to Park
    When parking the replacement property the amount needed to acquire that property is a sum certain.  However, when parking the relinquished property, it is often sold by the taxpayer to the EAT for a best guess of value.  Inevitably, the actual amount later received by a permanent buyer will deviate up or down.  So, when parking the relinquished property adjustments have to be made to deal with these deviations.  So all things being equal, usually the replacement property gets parked.  There are some factors which, when present, may suggest parking the relinquished property to be advantageous:

    The value of the relinquished property is much less than the replacement property so that the loan to the EAT is easy to attain
    The replacement property may involve special financing such as a Tax Increment Financing (TIF) or a Small Business Administration (SBA) loan which requires the taxpayer to be the borrower
    The replacement property may have some environmental issues which might involve some remediation of the issue

    Updated 2.15.2022.

  • Are 1031 Reverse Tax Deferred Exchanges of Real Estate Approved by the IRS?

    While Reverse Exchanges have been safe-guarded since 2000 there is still much confusion in the marketplace as to whether or not they are approved by the IRS. Let’s revisit the article below in which we cover frequently asked questions about Reverse Exchanges and discuss the history and evolution of them.  
    Real estate owners often receive conflicting advice about whether reverse tax deferred exchanges are legitimate tax strategies pre-approved as to structure by the IRS.  In fact, reverse tax deferred exchanges have a long history and continue to be a valuable tool for owners of real estate who hold property for investment or business purposes. Here are some of the questions that frequently come up and speak to the evolution of how reverse exchanges of real estate came to be approved. We’ll close this post with a look at the two approved structures in place today.
    What is a 1031 Reverse Exchange?
    A reverse exchange refers to the sequence of a taxpayer’s sale of relinquished property and the purchase of replacement property.  When circumstances require a taxpayer to acquire replacement property prior to the sale of relinquished property, that situation is known generally as a “reverse exchange” fact pattern.  Without further planning, the taxpayer’s direct purchase of the replacement property prior to the sale of the relinquished property, sometimes referred to as a “pure reverse” exchange is not approved by the IRS.  The ability to do a reverse exchange requires a taxpayer to structure the transaction in a manner providing for the taxpayer to sell the relinquished property before acquiring the replacement property.  In fact, the use of the term “reverse exchange” is a bit of a misnomer since the solution to deal with a reverse exchange fact pattern requires the sequence of sale and purchase to be accomplished with non-reverse timing.  There are a couple of ways that this can be accomplished.
    Do the Internal Revenue Service Regulations: IRC§1031 Allow for Reverse Exchanges?
    Not specifically. After the landmark legal decision in the Starker case and the 1991 Treasury Regulations that followed, exchanges became a lot easier to complete and therefore much more popular than before.  For the same reasons, the desire for taxpayers to complete reverse exchanges became much more popular at the same time.  In fact, during the comment period between May of 1990 and April of 1991 regarding the proposed regulations governing conventional forward exchanges (see Internal Revenue Service Regulations: IRC§1031), many persons requested the IRS to include guidelines for completing a reverse exchange at the same time.  In the preamble to those final regulations, however, the Treasury Department declined to do so stating: 

    “After reviewing the comments and the applicable law, the Service has determined that the deferred exchange rules of Section 1031(a)(3) do not apply to reverse-Starker transactions… however the Service will continue to study the applicability of the general rule of 1031(a)(1) to these transactions.”

    Does the IRS Revenue Procedure 2000-37 Allow for Reverse Exchanges?
    Yes. During the period from 1991 through 2000, many professional advisors structured reverse exchanges without the benefit of a “safe harbor” set forth by the IRS.  Fortunately, this uncertainty became clarified in September of 2000 with the issuance of Revenue Procedure 2000-37 (Rev. Proc.).  Basically, the Rev. Proc. suggested that an accommodating party could acquire the replacement property on behalf of the taxpayer and hold it for up to 180 days (shorter in some cases) allowing the taxpayer time to sell the relinquished property and immediately acquire the replacement property from the accommodating party.  Alternatively, the taxpayer could arrange for an accommodating party to acquire the relinquished property from the taxpayer, allowing the taxpayer to immediately acquire the replacement property…provided however, that the taxpayer found a bona fide buyer to acquire the property from the accommodator within 180 days (shorter in some cases).  Either of these steps would allow the taxpayer to effectively acquire the new property prior to the sale of the old property through an IRS approved reverse exchange structure. 
    What is an EAT in a Reverse Exchange?
    The Rev. Proc. referred to the accommodating party as an “Exchange Accommodation Titleholder”, which is currently often referred to as an “EAT”.  There are many companies that provide conventional forward exchange services (as a qualified intermediary) and a more limited number of those companies are also set up to provide EAT services.  The practice of holding title to a property on behalf of a taxpayer is often referred to as “parking” title to the property with the EAT.  For the mutual benefit of the taxpayer and the EAT, it is customary for the EAT to take title to the property using a special purpose entity, usually a limited liability company (“LLC”).  This insulates each separate client’s reverse exchange that is being facilitated by the EAT from other clients’ transactions and from the affairs of the exchange company acting as the member of the EAT.
    Today’s IRS Approved Reverse Exchange Structures
    1. Parking the Replacement Property
    The reverse exchange Rev. Proc. requires the taxpayer and EAT to enter into an overarching document referred to as a Qualified Exchange Accommodation Agreement (“QEAA”) describing the transaction, the relationship between the parties and reciting certain required terms. 

    Usually the taxpayer will already be under contract with the buyer prior to contacting the EAT in regard to the reverse exchange.  To shift the purchase over to the EAT, there is a simple assignment document assigning the purchase contract from the taxpayer to the EAT (Note that this assignment should not be confused with the assignment of rights to the Qualified Intermediary that takes place in a forward exchange.).
    The property acquisition financing on behalf of the EAT is either provided by the taxpayer or the taxpayer’s relationship lender, or a combination of both.  It is customary for the EAT to issue a Note and some kind of security interest such as a mortgage or a pledge of the membership interest in the limited liability company to the lender(s). 
    To avoid dealing with any property tenants, the EAT will typically enter into a Master Lease with the taxpayer so that the taxpayer can act as lessor in relation to the tenants.  This also puts the rental income into the taxpayers hand and not in the hands of the EAT.  The EAT simply wants to receive its fee.  The Rev. Proc. does not require the lease or loan to be arm’s length. 
    In addition to the QEAA, the parties typically enter into some kind of contract providing for the transfer of the property, or the membership in the LLC, to the taxpayer.  This takes place immediately after the taxpayer’s sale of the relinquished property. 
    Last, depending upon the type of property being parked, there is typically a Phase One environmental report or simply an environmental indemnification agreement between the parties. 

    To recap, the applicable documents generally are as follows:

    Qualified Exchange Accommodation Agreement
    Assignment of Purchase Contract
    Non-Recourse Promissory Note
    Mortgage, Deed of Trust or Pledge Agreement of Membership Interest
    Master Lease
    Limited Liability Company Sale Agreement
    Environmental Indemnity Agreement

    Final Step:  Entering into a reverse exchange with an EAT does not remove the necessity of doing a conventional forward exchange of the relinquished property for the replacement property.  Rather, it buys the taxpayer time to sell the relinquished property by arranging for the EAT to acquire the replacement property from the seller and to park it. The proceeds from the sale of the relinquished property are used to acquire the property from the EAT and the EAT uses those funds to pay back any prior loans made to the EAT for the original acquisition of the replacement property.
    A reverse exchange parking the replacement property combined with a forward exchange looks something like the following:

    2. Parking the Relinquished Property
    Parking the relinquished property entails similar documentation to that of a replacement property parking arrangement.  Conceptually, this arrangement is no different than a white knight showing up on the taxpayer’s doorstep to buy her property on the eve of the replacement property acquisition. 

    Per the Rev. Proc. an overarching agreement must be entered into between the taxpayer and the EAT known as the QEAA. 
    There will be a contract between the taxpayer and the EAT providing for the EAT’s purchase of the relinquished property. 
    Generally if that property has debt on it, the EAT can acquire the property subject to the debt allowing for the property to be purchased for the amount of the taxpayer’s equity.  That equity amount can be acquired through a bank loan or a direct loan from the taxpayer to the EAT.  Any amount lent to the EAT will be used immediately by the EAT to acquire the property and the amount of equity paid goes into the taxpayer’s forward exchange account. 
    There is a Note and a security instrument reflecting the amount lent to the EAT.
    A Master Lease allows for the taxpayer to deal directly with the tenants. 
    Depending upon the type of property, there may be a requirement for a Phase One Environmental Audit or an environment indemnity agreement.
    Last, there may be some type of surety document which will provide for the taxpayer to be responsible for the representations and warranties made to the ultimate buyer of the relinquished property upon sale to that party by the EAT.  
    When the relinquished property is sold by the EAT to a permanent buyer, the funds received by the EAT are used to pay back any loans originally made to the EAT as well as any debt that the EAT acquired the property subject to. 

    To park the relinquished property, the applicable documents generally are as follows:

    Qualified Exchange Accommodation Agreement
    Agreement for the Purchase of the Relinquished Property
    Non-Recourse Promissory Note
    Mortgage, Deed of Trust or Pledge Agreement of Membership Interest
    Master Lease
    Environmental Indemnity Agreement
    Surety Instrument

    Final Step:  Entering into a reverse exchange with an EAT does not remove the necessity of doing a conventional forward exchange of the relinquished property for the replacement property.  Rather, it buys the taxpayer time to sell the relinquished property by transferring that property to the EAT, thereby triggering a sale of that property, allowing the taxpayer to acquire the replacement property on a non-reverse basis and taking up to six months (shorter in some cases) to find a permanent buyer.
    A reverse exchange parking the relinquished property combined with a forward exchange looks something like the following:

    Determining which Property to Park
    When parking the replacement property the amount needed to acquire that property is a sum certain.  However, when parking the relinquished property, it is often sold by the taxpayer to the EAT for a best guess of value.  Inevitably, the actual amount later received by a permanent buyer will deviate up or down.  So, when parking the relinquished property adjustments have to be made to deal with these deviations.  So all things being equal, usually the replacement property gets parked.  There are some factors which, when present, may suggest parking the relinquished property to be advantageous:

    The value of the relinquished property is much less than the replacement property so that the loan to the EAT is easy to attain
    The replacement property may involve special financing such as a Tax Increment Financing (TIF) or a Small Business Administration (SBA) loan which requires the taxpayer to be the borrower
    The replacement property may have some environmental issues which might involve some remediation of the issue

    Updated 2.15.2022.

  • 1031 exchange tips: selecting the right QI

    In 2021, over 20% of commercial real estate participated in 1031 Exchanges and commercial property sales nearly doubled 2020’s totals. Real estate investors aren’t anticipating a slow down for 2022, this means another big year for 1031 exchanges. Given these projections, it is important to remember that choosing the right Qualified Intermediary to help you process your tax deferred exchange is crucial. Read through the tips below on choosing the right team to help you process your 1031 Exchange. 
    Choosing a Qualified Intermediary (QI) is an important decision, and as such, the process shouldn’t be taken lightly. After all, your QI will be guiding you through a maze of federal and state requirements as well as safeguarding the proceeds from the sale of your relinquished property. Given the potential tax consequences involved with an improperly structured exchange and the safety issues related to your proceeds, a true due diligence approach should be taken before committing to a QI.

    To begin, let’s take a quick look at some of the QI’s responsibilities:

    Structuring the exchange
    Preparing the related documentation
    Safeguarding proceeds from the sale of the relinquished property(s)
    Continuous monitoring and advising to ensure compliance with federal and state 1031 and QI requirements

    It’s important to note that there is currently no federal regulation of qualified intermediaries. However, with the help of the Federation of Exchange Accommodators (FEA), a number of states have begun taking the lead in assuring higher professional standards for QIs. Some of the newly enacted requirements (which can vary from state to state) include:

    Qualified escrow and/or trust accounts for client funds
    Minimum bond and insurance requirements
    Fund withdrawal authorization requirements
    Registration and licensing requirements for QIs
    Investment limitations on exchange proceeds

    These are just some of the new state level regulatory requirements for QIs, and Accruit has taken a leadership role in making sure that legislators are fully informed in order to properly protect exchangers. However, our responsibility to inform doesn’t stop there. It also includes educating the marketplace to ensure the right due diligence is performed prior to choosing a QI. Items we advise businesses to research include:

    The QI’s technical expertise and experience
    Banking processes and guidelines
    Certified Exchange Specialist® (CES®) on staff
    Quality control
    Insurance and bonding coverage
    Employee recruitment (including background checks with continuous monitoring)
    Membership in the FEA
    Applicability and QI’s status related to relevant state regulatory requirements
    References

    This article is merely intended to start a discussion regarding the importance of choosing the right QI. In practical terms, the process should be far more in-depth and you should include a trusted tax advisor as part of your decision team.
    If you’d like more information on selecting a QI, please contact us. We can help you understand the entire process and we’re glad to connect you with helpful resources in the tax industry and at the FEA.
     
    Updated 2.08.2022.

  • 1031 exchange tips: selecting the right QI

    In 2021, over 20% of commercial real estate participated in 1031 Exchanges and commercial property sales nearly doubled 2020’s totals. Real estate investors aren’t anticipating a slow down for 2022, this means another big year for 1031 exchanges. Given these projections, it is important to remember that choosing the right Qualified Intermediary to help you process your tax deferred exchange is crucial. Read through the tips below on choosing the right team to help you process your 1031 Exchange. 
    Choosing a Qualified Intermediary (QI) is an important decision, and as such, the process shouldn’t be taken lightly. After all, your QI will be guiding you through a maze of federal and state requirements as well as safeguarding the proceeds from the sale of your relinquished property. Given the potential tax consequences involved with an improperly structured exchange and the safety issues related to your proceeds, a true due diligence approach should be taken before committing to a QI.

    To begin, let’s take a quick look at some of the QI’s responsibilities:

    Structuring the exchange
    Preparing the related documentation
    Safeguarding proceeds from the sale of the relinquished property(s)
    Continuous monitoring and advising to ensure compliance with federal and state 1031 and QI requirements

    It’s important to note that there is currently no federal regulation of qualified intermediaries. However, with the help of the Federation of Exchange Accommodators (FEA), a number of states have begun taking the lead in assuring higher professional standards for QIs. Some of the newly enacted requirements (which can vary from state to state) include:

    Qualified escrow and/or trust accounts for client funds
    Minimum bond and insurance requirements
    Fund withdrawal authorization requirements
    Registration and licensing requirements for QIs
    Investment limitations on exchange proceeds

    These are just some of the new state level regulatory requirements for QIs, and Accruit has taken a leadership role in making sure that legislators are fully informed in order to properly protect exchangers. However, our responsibility to inform doesn’t stop there. It also includes educating the marketplace to ensure the right due diligence is performed prior to choosing a QI. Items we advise businesses to research include:

    The QI’s technical expertise and experience
    Banking processes and guidelines
    Certified Exchange Specialist® (CES®) on staff
    Quality control
    Insurance and bonding coverage
    Employee recruitment (including background checks with continuous monitoring)
    Membership in the FEA
    Applicability and QI’s status related to relevant state regulatory requirements
    References

    This article is merely intended to start a discussion regarding the importance of choosing the right QI. In practical terms, the process should be far more in-depth and you should include a trusted tax advisor as part of your decision team.
    If you’d like more information on selecting a QI, please contact us. We can help you understand the entire process and we’re glad to connect you with helpful resources in the tax industry and at the FEA.
     
    Updated 2.08.2022.

  • 1031 exchange tips: selecting the right QI

    In 2021, over 20% of commercial real estate participated in 1031 Exchanges and commercial property sales nearly doubled 2020’s totals. Real estate investors aren’t anticipating a slow down for 2022, this means another big year for 1031 exchanges. Given these projections, it is important to remember that choosing the right Qualified Intermediary to help you process your tax deferred exchange is crucial. Read through the tips below on choosing the right team to help you process your 1031 Exchange. 
    Choosing a Qualified Intermediary (QI) is an important decision, and as such, the process shouldn’t be taken lightly. After all, your QI will be guiding you through a maze of federal and state requirements as well as safeguarding the proceeds from the sale of your relinquished property. Given the potential tax consequences involved with an improperly structured exchange and the safety issues related to your proceeds, a true due diligence approach should be taken before committing to a QI.

    To begin, let’s take a quick look at some of the QI’s responsibilities:

    Structuring the exchange
    Preparing the related documentation
    Safeguarding proceeds from the sale of the relinquished property(s)
    Continuous monitoring and advising to ensure compliance with federal and state 1031 and QI requirements

    It’s important to note that there is currently no federal regulation of qualified intermediaries. However, with the help of the Federation of Exchange Accommodators (FEA), a number of states have begun taking the lead in assuring higher professional standards for QIs. Some of the newly enacted requirements (which can vary from state to state) include:

    Qualified escrow and/or trust accounts for client funds
    Minimum bond and insurance requirements
    Fund withdrawal authorization requirements
    Registration and licensing requirements for QIs
    Investment limitations on exchange proceeds

    These are just some of the new state level regulatory requirements for QIs, and Accruit has taken a leadership role in making sure that legislators are fully informed in order to properly protect exchangers. However, our responsibility to inform doesn’t stop there. It also includes educating the marketplace to ensure the right due diligence is performed prior to choosing a QI. Items we advise businesses to research include:

    The QI’s technical expertise and experience
    Banking processes and guidelines
    Certified Exchange Specialist® (CES®) on staff
    Quality control
    Insurance and bonding coverage
    Employee recruitment (including background checks with continuous monitoring)
    Membership in the FEA
    Applicability and QI’s status related to relevant state regulatory requirements
    References

    This article is merely intended to start a discussion regarding the importance of choosing the right QI. In practical terms, the process should be far more in-depth and you should include a trusted tax advisor as part of your decision team.
    If you’d like more information on selecting a QI, please contact us. We can help you understand the entire process and we’re glad to connect you with helpful resources in the tax industry and at the FEA.
     
    Updated 2.08.2022.

  • 1031 Tips: Deferred Like-Kind Exchange Deadlines – The Basics

    It’s been a number of years since we visited this article and while the core of 1031 exchanges have not changed, it is important to remember the foundation to ensure compliance. Two separate deadlines drive the 1031 exchange process and they are covered at length below. Another important concept discussed is how the 180-day exchange period which can be affected by the due date of the taxpayers return, so be sure to take special consideration of that as you read through the article below. 
    Despite working with like-kind exchanges (LKEs) for a number of years, we never tire of discussing the basics. That’s because, despite structural intricacies, LKEs are, at their core, deadline and document driven. It’s these basics that build a strong foundation for understanding LKEs as they increase in complexity. For this month’s LKE tip, let’s consider some basics and focus on exchange deadlines.
    LKEs generally consist of two separate deadlines:

    The 45-Day Identification Deadline and
    the 180-Day Completion Deadline.

    The 45-day window is frequently referred to as the “identification period,” while the 180-day window is often called the “exchange period.” Note that both deadlines are triggered on the same date and run concurrently.
    In a standard Delayed Exchange (taxpayer sells first and buys at a later date), both deadlines are triggered on the date ownership of the relinquished property is transferred. Under the standard Reverse Exchange structure (buy first, sell later), both deadlines are triggered on the initial ownership transfer date of the replacement property. However, for both types, the counting of days doesn’t actually begin until the day after ownership transfer occurs.
    In order to complete a valid 1031 exchange, the replacement property must be both:

    properly identified by midnight on day 45 and
    received by midnight on day 180.

    A couple other things to note:

    Both the 45- and 180-day deadlines include all calendar days, including weekends and holidays.
    The deadlines are absolute with extensions only allowed for:

    Presidentially declared disasters
    Terrorist or military actions
    Taxpayers serving in combat zones

    Furthermore, as we approach the end of the calendar tax year, it is vital to fully understand the 180-day deadline. The regulations clearly specify the exchange period as:

    “..the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) of the taxpayer’s return of the tax imposed by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.”

    In short, if you are participating in a like-kind exchange, be sure to review the due date of your tax return and contemplate the need to apply for an extension of time to file. Otherwise, you might find yourself with an unexpectedly short exchange period.
     
    Updated 2.07.2022.

  • 1031 Tips: Deferred Like-Kind Exchange Deadlines – The Basics

    It’s been a number of years since we visited this article and while the core of 1031 exchanges have not changed, it is important to remember the foundation to ensure compliance. Two separate deadlines drive the 1031 exchange process and they are covered at length below. Another important concept discussed is how the 180-day exchange period which can be affected by the due date of the taxpayers return, so be sure to take special consideration of that as you read through the article below. 
    Despite working with like-kind exchanges (LKEs) for a number of years, we never tire of discussing the basics. That’s because, despite structural intricacies, LKEs are, at their core, deadline and document driven. It’s these basics that build a strong foundation for understanding LKEs as they increase in complexity. For this month’s LKE tip, let’s consider some basics and focus on exchange deadlines.
    LKEs generally consist of two separate deadlines:

    The 45-Day Identification Deadline and
    the 180-Day Completion Deadline.

    The 45-day window is frequently referred to as the “identification period,” while the 180-day window is often called the “exchange period.” Note that both deadlines are triggered on the same date and run concurrently.
    In a standard Delayed Exchange (taxpayer sells first and buys at a later date), both deadlines are triggered on the date ownership of the relinquished property is transferred. Under the standard Reverse Exchange structure (buy first, sell later), both deadlines are triggered on the initial ownership transfer date of the replacement property. However, for both types, the counting of days doesn’t actually begin until the day after ownership transfer occurs.
    In order to complete a valid 1031 exchange, the replacement property must be both:

    properly identified by midnight on day 45 and
    received by midnight on day 180.

    A couple other things to note:

    Both the 45- and 180-day deadlines include all calendar days, including weekends and holidays.
    The deadlines are absolute with extensions only allowed for:

    Presidentially declared disasters
    Terrorist or military actions
    Taxpayers serving in combat zones

    Furthermore, as we approach the end of the calendar tax year, it is vital to fully understand the 180-day deadline. The regulations clearly specify the exchange period as:

    “..the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) of the taxpayer’s return of the tax imposed by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.”

    In short, if you are participating in a like-kind exchange, be sure to review the due date of your tax return and contemplate the need to apply for an extension of time to file. Otherwise, you might find yourself with an unexpectedly short exchange period.
     
    Updated 2.07.2022.

  • 1031 Tips: Deferred Like-Kind Exchange Deadlines – The Basics

    It’s been a number of years since we visited this article and while the core of 1031 exchanges have not changed, it is important to remember the foundation to ensure compliance. Two separate deadlines drive the 1031 exchange process and they are covered at length below. Another important concept discussed is how the 180-day exchange period which can be affected by the due date of the taxpayers return, so be sure to take special consideration of that as you read through the article below. 
    Despite working with like-kind exchanges (LKEs) for a number of years, we never tire of discussing the basics. That’s because, despite structural intricacies, LKEs are, at their core, deadline and document driven. It’s these basics that build a strong foundation for understanding LKEs as they increase in complexity. For this month’s LKE tip, let’s consider some basics and focus on exchange deadlines.
    LKEs generally consist of two separate deadlines:

    The 45-Day Identification Deadline and
    the 180-Day Completion Deadline.

    The 45-day window is frequently referred to as the “identification period,” while the 180-day window is often called the “exchange period.” Note that both deadlines are triggered on the same date and run concurrently.
    In a standard Delayed Exchange (taxpayer sells first and buys at a later date), both deadlines are triggered on the date ownership of the relinquished property is transferred. Under the standard Reverse Exchange structure (buy first, sell later), both deadlines are triggered on the initial ownership transfer date of the replacement property. However, for both types, the counting of days doesn’t actually begin until the day after ownership transfer occurs.
    In order to complete a valid 1031 exchange, the replacement property must be both:

    properly identified by midnight on day 45 and
    received by midnight on day 180.

    A couple other things to note:

    Both the 45- and 180-day deadlines include all calendar days, including weekends and holidays.
    The deadlines are absolute with extensions only allowed for:

    Presidentially declared disasters
    Terrorist or military actions
    Taxpayers serving in combat zones

    Furthermore, as we approach the end of the calendar tax year, it is vital to fully understand the 180-day deadline. The regulations clearly specify the exchange period as:

    “..the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) of the taxpayer’s return of the tax imposed by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.”

    In short, if you are participating in a like-kind exchange, be sure to review the due date of your tax return and contemplate the need to apply for an extension of time to file. Otherwise, you might find yourself with an unexpectedly short exchange period.
     
    Updated 2.07.2022.