Like-Kind Exchanges Present a Number of Tax Deferral Options Part 3 of 3

By S. Andrew Smith, CPA, Principal, Baker Newman Noyes

This article is the last in a 3-part series on the mechanics and tax benefits of Like Kind Exchanges

In Part I of our series of articles we covered some of the recent legislative changes to the §1031 rules and discussed the simplest form of a like-kind exchange, which is the rare simultaneous exchange. In Part II of our series, we highlighted the most common type of exchange used in the real estate world: the delayed exchange. In Part III below, we conclude the series by addressing the “reverse exchange.”

Reverse Exchange

Until now we have discussed simultaneous exchanges and acquisitions that follow sales. The last type of exchange involves acquisitions that precede sales.

With reverse exchanges, taxpayers have identified assets they wish to acquire but the acquisition will make other assets they own redundant. A §1031 transaction can be used in this case, but will require both a qualified intermediary (“QI”) and an exchange accommodation titleholder (“EAT”). The EAT is used to acquire (and sometimes operate) the replacement property until the exchange can be completed following the sale of the other property. Often, the EAT consists of a single-member LLC established and owned by the QI solely for that transaction.

To qualify as reverse exchange, the relinquished property generally must be sold within 180 days of the EAT acquiring the replacement property (the “safe harbor” method). Sometimes a party will engage a QI/EAT to acquire the property and the taxpayer simply cannot sell its own property during that window. Under certain circumstances, §1031 treatment may still apply, but only if a “burdens and benefits” test outlined in Revenue Procedure 2000-37 is met. Build to suit construction projects sometimes meet this criterion, and thereby qualify without the need for the safe harbor method.

Delayed reverse exchanges can be extremely complicated and as a result are quite costly to administer – particularly those falling outside the safe harbor. They require the QI, accountants, attorneys, and often lenders to work together on the taxpayer’s behalf to ensure the transaction is successful. Therefore, they tend to be utilized only when the tax benefits are significant or when other types of exchanges are unavailable.


The §1031 like-kind exchange provisions can defer gain and taxes under a number of scenarios. This series of articles has highlighted the various types of §1031 transactions available to taxpayers. A taxpayer’s goal to defer the taxes resulting from a sale usually can be accomplished with advance planning and proper expert advice. Where there is a will, there is a way, but it often requires some trade-offs and concessions.

To defer 100% of the gain, receipt of boot cannot accompany the exchange property. That means a taxpayer is unable to defer all of the gain AND pull some cash or equity out of the sale. To avoid boot, the value of the replacement property must exceed that of the relinquished property. Perfect matching is uncommon, so taxpayers often seek like-kind exchanges only when “trading up.” However, the presence of boot does not prevent application of §1031, and partial deferral can still be of value. There is no limit to the number of properties allowed to be relinquished or acquired as part of the exchange, and recall that nearly all business, investment or rental real estate, developed or not, generally will be considered of like kind one to another – including real estate located in separate states. Savvy taxpayers and their advisors who think creatively may be able to exchange a warehouse for a beachfront condo or a retail strip mall for a multi-unit residential building. Changing locales, industries, or usage types can allow taxpayers to diversify and reduce risk without paying a tax “toll charge.”

These variables, applied to the different methods of deferral explained above, give a property owner many opportunities to defer taxes, and the astute taxpayer or real estate professional will not overlook them.

S. Andrew Smith is a Tax Principal at Baker Newman Noyes specializing in closely held business and real estate transactions. He has advised on numerous Section 1031 transactions. If you think a like-kind exchange is something that could benefit you, please contact Andy at

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