What is a reverse 1031 exchange?
A reverse 1031 exchange is a like-kind exchange in which you acquire the replacement property first and sell the relinquished property afterward. Because you cannot own both properties yourself and call it an exchange, a third party called an exchange accommodation titleholder (EAT) holds title to one of them until the swap is complete.
The IRS safe harbor for this structure is Revenue Procedure 2000-37, which took effect for arrangements starting on or after September 15, 2000. It calls the setup a qualified exchange accommodation arrangement. If you follow its rules, the IRS will treat the EAT as the owner during the parking period and respect the exchange.
A forward exchange runs the other way: you sell, a qualified intermediary holds the cash, and you buy within 180 days. The tax result is the same in both. The order of closings, the financing and the cost are what change.
Reverse vs forward 1031 exchange
The difference between a reverse and a forward 1031 exchange is the order of closings: in a forward exchange you sell first and buy second, and in a reverse exchange you buy first. Both defer the same tax and both run on 45-day and 180-day clocks, but what gets identified and who holds title change.
| Feature | Forward exchange | Reverse exchange |
|---|---|---|
| Order of closings | Sell, then buy | Buy, then sell |
| Who holds what | Qualified intermediary holds the sale cash | EAT holds title to a property |
| What you identify by day 45 | Replacement property | Property you will sell |
| Main rule | Treas. Reg. 1.1031(k)-1 | Rev. Proc. 2000-37 safe harbor |
| Funding the purchase | Sale proceeds | Cash, bridge loan or loan to the EAT |
| Relative cost | Lower | Several times higher |
Why owners use a 1031 reverse exchange
Owners use a 1031 reverse exchange when the right replacement property comes along before their current building has a buyer. Without it, you either lose the deal or buy outside the exchange and pay tax when the old property sells.
Other reasons come up often. A seller of the replacement building may want a fast close. The 45-day identification window in a forward exchange can feel too short in a tight market. Some owners want to renovate or build on the replacement before the exchange is done, which is the improvement exchange covered below.
How it works: parking the property
The EAT, usually a single-purpose LLC set up by the intermediary, takes title to either the new property or the old one and holds it while the other side of the exchange closes. There are two ways to set it up.
- Exchange-last (park the replacement): the EAT buys and holds the new building. When your old building sells, the intermediary completes the exchange and the EAT deeds the new building to you. This is the most common approach.
- Exchange-first (park the relinquished property): you buy the new building directly, and the EAT takes title to your old building until a buyer closes. It is used less often, partly because the lender on the old property must consent to the transfer.
- In either case, you and the EAT must sign a qualified exchange accommodation agreement within five business days after the EAT takes title.
- The EAT usually leases the parked property back to you, so you can collect rent and run it during the parking period. Rev. Proc. 2000-37 allows that lease, loans or advances from you to the EAT, and your backing of the EAT’s loan.
Reverse 1031 exchange timeline
A reverse 1031 exchange timeline starts on day 0, the day the EAT takes title to the parked property, and ends no later than day 180. Every deadline in Rev. Proc. 2000-37 counts from that date. They are fixed and do not move for weekends or holidays, and the combined time both properties can sit in the parking arrangement is also capped at 180 days under Section 4.02(6).
The table uses the dates from the worked example below, with the EAT taking title on Tuesday, March 2, 2027.
Build your own schedule backward from day 180. An apartment sale needs time for listing or finding a buyer, the buyer’s inspections, the buyer’s loan approval, title work and the closing itself, and any of those can slip. If your building is not under contract by the time you identify it on day 45, the rest of the window gets tight fast. Owners who do best with a reverse exchange usually have the sale side lined up, or at least priced and on the market, before the EAT closes on the replacement.
The front end matters as well. Your intermediary needs time to form the EAT and draft the agreement, and a lender lending to an EAT will want to review those papers. Start that work well before the replacement closing date in your purchase contract. The safe harbor clock does not start until the EAT actually takes title, so early paperwork costs you no time.
- Day 180 in this example falls on a Sunday. The deadline does not roll to Monday, so plan the sale to close and record by Friday, August 27.
- The 45-day identification follows the forward exchange rules in Treas. Reg. 1.1031(k)-1(c). Those rules allow up to three properties regardless of value, or more under the 200% rule, which caps their combined value. Ask your intermediary how it applies the 200% test in a reverse exchange.
- The identification must be in writing, signed by you and delivered before day 45 to a person involved in the exchange who is not you or a disqualified person, usually the intermediary.
- If you need more time to sell, there is no extension inside the safe harbor. Talk to your CPA before day 180 about what happens to the parked property.
| Day | Example date | What must happen | Source |
|---|---|---|---|
| Before day 0 | Before the replacement closes | Engage the intermediary, form the EAT and line up financing. You cannot have owned the replacement property in the 180 days before parking | Rev. Proc. 2004-51 |
| Day 0 | Tue, March 2, 2027 | The EAT takes title to the replacement property and the parking arrangement begins | Rev. Proc. 2000-37, Sec. 4.02 |
| 5 business days | Tue, March 9, 2027 | Sign the qualified exchange accommodation agreement with the EAT | Rev. Proc. 2000-37, Sec. 4.02(3) |
| Day 45 | Fri, April 16, 2027 | Identify in writing the property you will sell | Rev. Proc. 2000-37, Sec. 4.02(4) |
| Day 180 | Sun, August 29, 2027 | Sell the relinquished property and move the parked property out of the EAT | Rev. Proc. 2000-37, Sec. 4.02(5) |
| Day 185 | Fri, September 3, 2027 | Outside limit for any purchase or sale agreement, such as a put or call, between you and the EAT | Rev. Proc. 2000-37, Sec. 4.03 |
Financing a reverse exchange
Financing is the hardest practical part, because you have to pay for the new building before the sale proceeds from the old one exist. Owners use cash reserves, a line of credit, a bridge loan or a loan from themselves to the EAT, which then uses the money to buy the property.
Many conventional lenders, and especially agency multifamily lenders, are unfamiliar with lending to an EAT. Expect extra underwriting time and legal documents, and expect the lender to want you to personally back the loan. Talk to both your lender and your intermediary before you sign a purchase contract.
What a reverse 1031 exchange costs
The cost of a reverse 1031 exchange is several times that of a forward exchange, because the intermediary forms an entity, takes title, signs loan documents and carries some liability for the property. Fees are set by each intermediary and are not regulated by the IRS, so get written quotes from more than one.
Expect these line items:
- An accommodation fee to the intermediary for setting up and running the EAT
- Legal fees to draft the accommodation agreement, the lease back to you and the loan papers
- A second deed and recording fees, plus transfer tax in some states and counties when title moves from the EAT to you
- Lender legal and processing fees for a loan to the EAT
- Property and liability insurance naming the EAT during the parking period
- Extra charges if you are doing an improvement exchange, since the EAT must manage construction draws
How an improvement 1031 exchange works
An improvement exchange, also called a build-to-suit or construction exchange, uses the same EAT structure so that renovation or construction on the replacement property counts toward the value you receive in the exchange. Rev. Proc. 2000-37 allows the taxpayer to supervise improvements and act as contractor while the EAT holds title.
This helps an owner who would otherwise trade down. Say you sell a $2 million building but the replacement costs $1.6 million and needs $400,000 of work. If the EAT completes that work before deeding the property to you, the replacement can be worth $2 million at transfer.
Only improvements in place when the EAT transfers the property count. Work done after the 180th day, or money spent on future work, does not. Plan the construction schedule with a margin, because permits and contractors rarely run early.
Worked example: a reverse exchange on a 24-unit building
This example shows the timeline and the tax at stake.
You own a 24-unit building you could sell for $2,400,000. You paid $1,400,000 and have taken $500,000 of depreciation, so your adjusted basis is $900,000 and your gain would be $1,500,000.
If you sold without an exchange and were in the top bracket, the $500,000 of depreciation would be taxed at up to 25%, or $125,000, per IRS Topic 409. The other $1,000,000 would be taxed at 20%, or $200,000; for 2026, that rate starts above $545,500 of taxable income for single filers and $613,700 for joint filers (Rev. Proc. 2025-32). The 3.8% net investment income tax would add $57,000. Federal tax at stake: about $382,000, before any state tax.
You find a $3,200,000 replacement that must close now. The EAT takes title on March 2, 2027, funded by a bridge loan and a loan from you. You must sign the accommodation agreement by March 9 (five business days), identify the 24-unit building as the property to sell by April 16 (45 days) and close that sale by August 29 (180 days).
Because the replacement costs more than the sale price and you reinvest all your net equity, the full gain can be deferred. If the old building has not sold by August 29, the safe harbor is lost and the $382,000 is back on the table. That is why the sale side needs a buyer who can close on a fixed date.
Risks and how to reduce them
The main risk is that your old building does not sell within 180 days. If that happens, the safe harbor no longer applies and you may own two buildings with the exchange in doubt.
- Price the relinquished property to sell, and start marketing before the replacement closes.
- Line up a buyer who can close with certainty; in a reverse exchange, a sure close is worth more than a slightly higher price from a buyer who might fail.
- Avoid related-party sales unless your CPA clears them; Form 8824 instructions apply a two-year holding rule to exchanges with related parties.
- Do not park a property you owned in the prior 180 days; Rev. Proc. 2004-51 takes it out of the safe harbor.
- Confirm early whether your state has its own exchange or intermediary rules.
Reverse exchanges, DSTs and syndications
An interest in an LLC or limited partnership that owns real estate, such as a syndication interest, is generally not real property for Section 1031, so it cannot serve as replacement property. A beneficial interest in a Delaware statutory trust can, under Revenue Ruling 2004-86, which is why some owners use a DST as a backup if a reverse exchange or a forward exchange runs short of time.
Skyline Capital Investments sponsors apartment syndications and runs an investor network for owners who want passive exposure after they sell. Any offering is made only through official offering documents to eligible investors. Most syndications, including ours, are for accredited investors, and the rules differ between Rule 506(b) and Rule 506(c) offerings.
How Skyline helps on the sale side
If you have parked a replacement and need your apartment building sold inside the 180-day window, a buyer with a predictable closing date lowers the risk. Skyline buys buildings with five or more units nationwide. We buy directly, close on your timeline, and can work inside 1031 deadlines. Tell us your EAT closing date and your 180th day, and we will tell you plainly whether our timeline fits.
