During the 180-day window it takes to complete a Exchange Accommodation Titleholder, more commonly referred to as an EAT, and does what it says: it holds the title – nothing more. The property is then leased from the EAT, also the QI, to the taxpayer/exchanger. The EAT allows the investor to have full access to the new replacement property, also allowing access to profits from the new property right away. Let’s use an example to break down a reverse exchange and its benefits:
A commercial real estate investor owns an apartment building with a market value of $3.2 million and yields a monthly rental income of $15,000 This investor wants to upgrade their investment and purchase an office building for $5.3 million, which generates a monthly $25,000 in rental income. The investor enters into a contract to acquire the office building.
This situation is where we encounter a problem. The investor has already identified the replacement property they would like to purchase and entered into a contract to purchase. Still, they have not sold the apartment building nor begun a forward exchange. If the investor holds ownership of those properties simultaneously, they can no longer transact a tax-deferred exchange. This investor does not want to lose the opportunity of a new office building by waiting until the apartment building is sold, nor can they afford to lose the monthly rental earnings from the apartment building by following the timeline of a forward exchange. Therein lies the problem for some investors when considering a forward exchange.
The investor consults with their legal and tax advisors on what to do and decides to move forward with a