Reverse Exchanges and Build-to-Suit Exchanges

A reverse exchange allows the investor to acquire the replacement property before selling the relinquished property. The IRS authorized this structure under Revenue Procedure 2000-37. In a reverse exchange, an Exchange Accommodation Titleholder (EAT)—typically a single-purpose LLC controlled by the QI—takes title to either the replacement property (most common) or the relinquished property. The EAT holds the property ("parks" it) until the other property is sold, at which point the exchange is completed. The 45-day identification and 180-day completion deadlines still apply, measured from the date the EAT acquires the parked property. Reverse exchanges are more expensive than forward exchanges ($5,000-$15,000 in additional fees for the EAT entity, parking arrangement, and additional legal documentation). They require more advance planning but eliminate the risk of losing the replacement property while waiting for the relinquished property to sell.

A build-to-suit exchange (also called an improvement exchange) allows the investor to use exchange proceeds to construct or improve the replacement property. The EAT takes title to the replacement property, and exchange funds are used to make improvements before the property is transferred to the investor. The improvements must be completed within the 180-day exchange period. This structure allows investors to exchange into a property that needs significant renovation—using pre-tax exchange dollars for the improvements. Example: An investor sells a property for $500,000 and identifies a building requiring $200,000 in renovations. The EAT purchases the building for $300,000 and uses $200,000 of exchange funds for the renovations. After completion (within 180 days), the EAT transfers the improved $500,000 property to the investor. The investor achieves full deferral because the replacement value equals the relinquished value.

Delaware Statutory Trusts (DSTs) and Tenancy-in-Common (TIC) interests provide backup replacement options for investors who cannot find a direct replacement property within the 45-day window. A DST is a passive investment in institutional-quality real estate (apartments, offices, industrial properties) that qualifies as like-kind replacement property. The investor purchases a fractional interest in the DST, deferring the exchange gain. DSTs are particularly useful as a "safety valve"—if the primary replacement falls through, the investor can identify a DST as one of the three properties under the 3-Property Rule and close quickly to avoid a failed exchange. TIC interests provide direct fractional ownership in a specific property. Both DSTs and TICs are passive investments with no management responsibilities—making them suitable for investors who want to transition from active management to passive income. DST minimum investments typically start at $100,000-$250,000.