REVERSE EXCHANGE QUESTIONS AND ANSWERS
What is a “Reverse (Starker) Exchange”?
It is an exchange in which the replacement (target) property must be acquired before the relinquished (exchange) property sells. In order to preserve the appearance of an exchange, it always involves four parties: the EXCHANGER, the seller of the replacement property, the buyer of the relinquished property, and the accommodator who facilitates the exchange.
Why would a person acquire replacement property before exchanging the relinquished property?
1. Sometimes a simultaneous exchange is planned but the sale of the relinquished property is delayed and it is not possible to delay the acquisition of the replacement land.
2. Sometimes the EXCHANGER plans to exchange, puts his relinquished property on the market, and finds the ideal replacement property. Unfortunately, the seller will not cooperate in delaying closing to facilitate an exchange.
May the EXCHANGER acquire the replacement property through escrow and then sell the relinquished property, and call it an exchange?
No. Once the replacement property is in the name of the EXCHANGER, the exchange is completed...even if it has not yet begun.
How is a reverse exchange structured?
The accommodator acquires the replacement property and holds it waiting for the sale of the relinquished property. When it is ready to close, it is exchanged for the replacement property and sold by the accommodator.
Where does the money come from?
The EXCHANGER must loan the funds to the accommodator.
Can this advance be secured?
Yes. It is common to use a note and deed of trust. This security will be paid of when the relinquished property sells.
What if it is necessary to borrow from a lender to acquire the replacement property? The exchange is then structured in this way: the replacement property is acquired by the accommodator and then exchanged for the relinquished property. The loan documents are then recorded as a lien on the replacement property and the transaction funded with proceeds going to the seller. The relinquished property later sells and the proceeds used to repay the sums advanced by the EXCHANGER.
Who manages the property owned by the accommodator?
According the September 15, 2000 new Rev Proc 2000-37, the EXCHANGER may manage the property.
How are obligations owed and income received handled?
The accommodator must disburse all funds which benefit the property to which it is in title. All income must be received by the accommodator. Income cannot be disbursed to the EXCHANGER until the exchange is completed.
How is an accommodator located? What will this cost?
Not all accommodator companies perform the services required for a reverse exchange. Before agreeing to this form of exchange, inquire about the experience and financial backing of the accommodator. This is a complex type of exchange. The cost will be higher than a routine delayed exchange.
What do I do next?
Talk to your attorney or C.P.A. Call me when you are ready to proceed.