Reverse and Improvement Exchanges
A reverse exchange occurs when a Taxpayer wants to acquire replacement property prior to the closing of the relinquished property. Although common terminology calls this type of transaction a "reverse exchange," the Taxpayer (also referred to as the "Exchangor") does not actually acquire the replacement property first and dispose of the relinquished property later. Instead, the Taxpayer must arrange for an Exchange Accommodation Titleholder (or "EAT") to take title to either the relinquished property or the replacement property.
This allows the Taxpayer to comply with the "relinquish first, replace later" order, while satisfying a market requirement to close on the replacement property.
An improvement exchange occurs when the Taxpayer wants to acquire replacement property and build improvements on it during the exchange period. This usually occurs when the Taxpayer determines that he will have exchange funds in excess of the cost of the replacement property. The excess equity is used to construct improvements on the replacement property.
See articles below for additional information on reverse and improvement exchanges.
Reverse 1031 Exchanges
Reverse Exchanges after Revenue Procedure 2000-37
The Reverse Exchange - An Overview