Section 1031 of the Internal Revenue Code permits a taxpayer to defer capital gains tax when an investments property is transferred in exchange for another of “like-kind.” The “Reverse Exchange” is a specialized transaction that occurs when an Exchangor desires to acquire Replacement Property (new) prior to selling their Relinquished Property (old).
On September 15, 2000, the IRS officially embraced reverse exchanges with issuance of Revenue Procedure 2000-37 (“Rev. Proc. 2000-37”). Since an Exchangor is prohibited from owning both the new and old properties at the same time, this Revenue Procedure creates a framework for a “safe harbor” reverse exchange. If an Exchangor follows the guidelines of the Rev. Proc. 2000-37, the IRS has indicated that it will not challenge the form of the exchange. A reverse exchange may be done outside the safe harbor, but the Exchangor loses the benefit of the favorable presumptions contained in Rev. Proc. 2000-37.
