What Is Revenue Procedure 2000-37 for Reverse Exchanges?

Revenue Procedure 2000-37 provides IRS guidance for a reverse like-kind exchange. This procedure establishes a “safe harbor,” a set of rules that, if followed, ensures the IRS will not challenge the transaction’s tax-deferred status. A standard like-kind exchange under Section 1031 of the Internal Revenue Code allows an investor to defer capital gains taxes by selling an investment property and acquiring a similar one.

A reverse exchange flips this sequence; the investor acquires their desired new property before they have sold their old one. Since a taxpayer cannot own both the old and new properties simultaneously and still qualify for tax deferral, the procedure outlines a formal structure where an independent third party holds one of the properties. This provides a clear roadmap for completing these transactions.

Key Safe Harbor Requirements

To qualify for the protections offered by Revenue Procedure 2000-37, the transaction must be structured under a Qualified Exchange Accommodation Arrangement (QEAA). This is a formal, written agreement between the taxpayer and an Exchange Accommodation Titleholder (EAT). The QEAA allows the IRS to recognize the EAT as the beneficial owner of the property for tax purposes.

The Exchange Accommodation Titleholder is an entity that temporarily holds title to a property on behalf of the taxpayer. This entity cannot be the taxpayer or a “disqualified person,” such as a family member or an agent like an attorney who has recently worked for the taxpayer. The EAT is a specialized company, often a single-member LLC, created for the sole purpose of facilitating the exchange.

A limitation is that the safe harbor does not apply if the replacement property was owned by the taxpayer within the 180-day period ending on the date the property is transferred to the EAT. This prevents a taxpayer from using the safe harbor for property they already owned.

For the arrangement to be valid, the EAT must hold “qualified indicia of ownership” (QIOA). This means the EAT must possess legal title to the property or other ownership attributes recognized by law. This formal ownership allows the transaction to proceed without the taxpayer being in direct ownership of both properties at once.

Two deadlines are central to the safe harbor. The first is a 45-day identification period, which begins when the EAT acquires the parked property. Within this window, the taxpayer must identify in writing the property they intend to sell, known as the relinquished property, and deliver it to a party like the EAT. The second deadline is the 180-day exchange period. The entire reverse exchange must be completed within 180 days from when the EAT first acquired the property, meaning the relinquished property is sold and the replacement property is transferred to the taxpayer.

The Transaction Process Step-by-Step

The process begins when the taxpayer finds a replacement property to acquire before their current property is sold. The taxpayer then engages an Exchange Accommodation Titleholder and both parties enter into a written Qualified Exchange Accommodation Arrangement (QEAA).

With the QEAA in place, the EAT acquires and holds title to the new replacement property. The taxpayer provides the funds for this purchase through a loan to the EAT or by guaranteeing a loan from a third-party lender. This “parking” of the replacement property with the EAT is what allows the process to continue.

Once the EAT takes title to the replacement property, the taxpayer has 45 days to formally identify in writing the relinquished property they intend to sell.

The taxpayer then markets and finds a buyer for their identified relinquished property. The sale is structured as a standard forward exchange, involving a Qualified Intermediary. Proceeds from selling the relinquished property are sent directly to the Qualified Intermediary to avoid constructive receipt of the funds.

To finalize the transaction, the funds held by the Qualified Intermediary are used to “purchase” the replacement property from the EAT, repaying it for the initial acquisition. The EAT then transfers legal title of the replacement property to the taxpayer, completing the exchange within the overall 180-day window.

Permissible Agreements with the Exchange Accommodator

Revenue Procedure 2000-37 allows for several types of agreements between the taxpayer and the Exchange Accommodation Titleholder (EAT) that facilitate the transaction. These arrangements are designed to let the taxpayer manage the economic aspects of the property while the EAT holds temporary legal title.

One of the most common arrangements involves financing. The taxpayer is permitted to loan funds directly to the EAT to enable the purchase of the parked property. Alternatively, the taxpayer can guarantee a loan made to the EAT by a third-party lender.

The taxpayer can also lease the property from the EAT during the exchange period. This is a common scenario when the replacement property is parked, allowing the taxpayer to use the property for its intended business or investment purpose and pay rent to the EAT.

The taxpayer is also allowed to oversee the property. This includes managing the asset, supervising any improvements or construction, and acting as the contractor for such work. These agreements ensure the taxpayer can protect their investment while it is legally held by the EAT.