Exchange First … Or Last?
In an Exchange Last transaction, the Replacement Property is parked with the EAT, who assigns into the contract to purchase and takes title to it. The acquisition is often funded by a loan arranged by the Exchangor. The Exchangor must close on the Relinquished Property within the 180 Day Exchange Period, calculated from the day following the closing of the Replacement Property. When the Relinquished Property is sold, the EAT completes the exchange by directly deeding the Replacement Property to the Exchangor. The Exchange Last transaction provides the Exchangor with flexibility in cases where the Exchangor is either uncertain which of their property will serve as the Relinquished Property when they own more than one or when the Exchangor is concerned about closing the Relinquished Property because of issues with the buyer. After the Relinquished Property has been transferred to the buyer, the Replacement Property and any net sales proceeds from the Relinquished Property are transferred to the Exchangor to complete the Exchange Last reverse exchange.
A transaction where the Relinquished Property is parked with the EAT is referred to as an Exchange First transaction. Please note that Pioneer 1031 Company does not facilitate Exchange First transactions or Relinquished Parked exchanges. The EAT usually takes title to the Relinquished Property immediately prior to the Exchangor’s acquisition of the Replacement Property. While the forward exchange is over quickly, the parking transaction may continue for the entire Exchange Period as the Exchangor locates a third-party buyer for the Relinquished Property. Many lenders prefer this transaction because it allows title to the Replacement Property to vest in the Exchangor, the real party in interest and the borrower under the loan agreement. Once a third-party buyer is found for the Relinquished Property, the EAT transfers title to it to the buyer and applies any net sales proceeds to retire any debt, or portion thereof, incurred by the EAT on its acquisition of the Replacement Property. Occasionally, a Qualified Intermediary may require an Exchange First transaction because of identified environmental issues with the Replacement Property. Because Rev. Proc. 2000-37 does not require the Exchangor to use one or the other approach in order to achieve a nontaxable reverse exchange, the Exchange First concept provides added flexibility to the process.
