Rattikin Exchange Services, Inc. provides qualified intermediary services to facilitate Sec. 1031 exchanges, reverse exchanges and construction exchanges. The firm has handled well over $300,000,000 worth of exchanges on a local, state and national level. We offer our clients the highest degree of integrity, professionalism and efficiency, at a price well below that charged by the national exchange companies.

In order to initiate a reverse exchange, a party desiring to complete the exchange must first appoint an Exchange Accommodation Titleholder (the “EAT”) (as explained below), and execute several instruments required to document the exchange, including the following:

(1) Qualified Exchange Accommodation Agreement between the Purchaser and this firm, which outlines the nature of the exchange and the parties’ obligations thereunder;
(2) Original Assignment of Rights and Notification-Replacement Property, which assigns the Purchaser’s interest in the above Contract to the EAT;
(3) Reverse Exchange Waiver and Release;
(4) Identification of Relinquished Property;

In order to facilitate a reverse §1031 tax deferred exchange, at the closing of your purchase you will execute the first three documents mentioned above. Basically, the Qualified Exchange Accommodation Agreement outlines your rights and obligations in connection with the exchange. The Assignment of Contract assigns your interest in the contract to the EAT, which entitles the EAT to purchase the property and obtain title thereto to hold pending the sale of relinquished property. The Notice, Waiver and Release form is necessary to induce the EAT to act as Exchange Accommodation Titleholder in the reverse exchange process.

Please note that the Internal Revenue Service issued procedural guidelines with respect to reverse 1031 exchanges (IRS Revenue Procedure 2000-37, IRB 1 (September 15, 2000)). The documentation mentioned above incorporates such procedures. Pursuant to the procedures, and unlike most regular tax-free exchanges, title to the Property must be temporarily vested in the name of an Exchange Accommodation Titleholder, or EAT, who will hold title until you sell the property subject to the potential capital gains tax. To facilitate reverse exchanges in which RESI is involved, we have formed a separate holding entity, named Texas Reverse Exchange Holding Company, L.L.C., to act as EAT and hold title pending your subsequent sale. The warranty deed and the Owner’s Title Policy issued in connection with this transaction shall reflect the grantee and insured as “Texas Reverse Exchange Holding Company, L.L.C., as Exchange Accommodation Titleholder for _____________ and ___________________, as their interests may appear”, pursuant to Rate Rule P-63.

Additionally, typically our client will arrange for financing, either through you, a third party lender or through the seller, to facilitate the EAT’s purchase of the Property. Since the EAT will be the actual purchaser, the loan will be in the EAT’s name, on a nonrecourse basis. Typically, you or your lender will require the following documents at closing, in addition to the above:

(1) Nonrecourse Real Estate Lien Note executed by the EAT;
(2) Nonrecourse Deed of Trust executed by the EAT;
(3) Guaranty Agreement to be executed by you;
(4) Lease Agreement executed by the EAT and you;
(5) Settlement Statement executed by the EAT, and approved by you;

Please verify with your lender which of the above documents will be required for this transaction.

The reverse exchange procedures require you to identify potential relinquished property to be sold to complete the exchange within 45 days from the transfer of the Replacement Property. Prior to the expiration of the 45 day identification period, you must forward the Identification Form referred to in item 4 in the first paragraph above to this firm. Thereafter, prior to the expiration of 180 days from the Replacement Property closing date, or the due date of your Federal income tax return for the year in which the Replacement Property closing occurs, you must enter into a separate Exchange Agreement with RESI under which this firm will serve as Qualified Intermediary. Pursuant thereto, you will assign to this firm your rights under a contract to sell other property owned by you which will serve as your “Relinquished Property.” This firm, as Qualified Intermediary, will close on the sale of the Relinquished Property and receive the net proceeds derived therefrom. We will use such funds to purchase the Replacement Property from the EAT. The EAT will pay off any purchase money loans obtained to purchase the Replacement Property and, immediately thereafter, convey the Replacement Property to you by Special Warranty Deed to complete the exchange.

I hope this article explains to some extent the process involved in completing a reverse tax deferred exchange.  

Copyright 2009 Jeffrey A. Rattikin, all rights reserved