A Reverse Exchange (also called “Starker”) allows the Exchanger to purchase a Replacement Property before he sells his Relinquished Property. Investors can qualify for the §1031 tax treatment in a Reverse Exchange by following the IRS rules found in Rev. Proc. 2000-37.

Reverse Exchanges may cost more than a regular Like-Kind Exchanges with its legal and additional fees. Therefore, a Reverse Exchange procedure should only be used if the size of the transaction and the resulting savings in capital gains justify the additional fees and expenses.  Reverse Exchanges can solve many exchange dilemmas. However, the Exchanger will need to enlist the help of an Exchange Accommodation Titleholder (EAT). The Exchanger can also choose from and Exchange Last or an Exchange First structure.

The Exchange Last Structure is the most common form of a Reverse §1031 Starker Exchange. In this case, the EAT holds the title to the Replacement Property.  During this exchange, the Exchanger enters into a QEAA with the EAT, who then forms an LLC (or other special purpose entity).  The LLC then receives the purchase contract for the Replacement Property. If a loan is required in this exchange, the EAT will sign the loan documents on a non-recourse basis.  The Exchanger can guarantee the loan document on a recourse basis.

The EAT keeps the title to the Replacement Property and usually Triple-Net-Leases (NNN) the property to the Exchanger (these components of the exchange should be outlined in the QEAA). This is a tax-neutral structure for the EAT.

The Exchange First Structure is another form of a Reverse §1031 Exchange. In this case, the Qualified Intermediary (QI) drafts a Purchase and Sale Contract for the Relinquished Property. The EAT would then form an LLC to hold the title to the Relinquished Property. When the Exchanger sells the Relinquished Property, the EAT would give the deed directly to the buyer and transfer the net sales directly to the Exchanger (after satisfying any loans).

This option allows for more conventional financing on the Replacement Property. If the EAT holds the Replacement Property (as in the case of Exchange Last structure), lenders may be less likely to lend on that property. But if the EAT holds the Relinquished Property, lenders may be more likely to lend on the Replacement Property.  Reverse §1031 exchanges give the Exchanger the flexibility to take more time to locate the ideal replacement property, without the pressure of the Like-Kind §1031 exchange deadlines.