New Reverse Exchange Ruling...

IRS Modifies Reverse Exchange Ruling...

In the past month (July 2004), the IRS has issued a ruling (Rev. Proc. 2004-51) intended to clarify the rules about 'reverse' or 'parking' style property exchanges. The new ruling makes it clear that an exchanger cannot use a reverse exchange parking procedure to exchange into property the exchanger already owns.

A previous IRS ruling (Rev. Proc. 2000-37), issued in 2000, outlines a procedure for reverse exchanges. In a reverse exchange, the Qualified Intermediary usually sets up an "accommodation titleholder" entity to purchase and "park" property that will be used for an exchange. This structure is useful when an exchanger needs to buy new property before selling their 'old' exchange property, or to use exchange proceeds to build improvements on the new property.

Apparently, some exchangers were using the reverse exchange structure to transfer property they already own to their Q.I. to park, and then re-acquiring that same property in the exchange. With this new ruling, the IRS has modified the reverse exchange procedure to forbid such an exchange. Specifically, the reverse exchange procedure is now modified so that it does not apply to any property owned by the exchanger within 180 days prior to the exchange.

--The Experts