Document 2000-37 outlines safe harbor rules and regulations for reverse 1031 exchanges. As long as taxpayers observe the guidelines stated in 2000-37, the IRS will not challenge the qualification of the real property involved in the transaction.


Understanding Reverse 1031 Safe Harbor Rules and Regulations

Aug 17, 2017

No matter how much we may wish otherwise, there’s no denying that section 1031 exchanges are entangled in a vast web of complex rules and regulations. Most investors—and many real estate professionals, for that matter—wish things were simpler, that the applicable rules could be neatly wrapped up and conveyed in just a few easily digestible statements. Unfortunately, the complexity of 1031 exchanges is practically impossible to erase.

The good news, however, is that there have been strides made to simplify the rules that govern 1031 exchanges and make exchange transactions run more smoothly. Revenue Procedure 2000-37 is one of these strides. This document, which was issued by the IRS in 2000, provides taxpayers with a much-needed layer of predictability for reverse 1031 exchanges, which is significant because these types of exchanges have been weighed down by a fair bit of uncertainty.

Document 2000-37 outlines safe harbor rules and regulations for reverse 1031 exchanges. As long as taxpayers observe the guidelines stated in 2000-37, the IRS will not challenge the qualification of the real property involved in the transaction, and it won’t challenge the recognition of the exchange accommodation titleholder (EAT) as the beneficial owner of the real property throughout the course of the exchange.

Creating a Safe Harbor for Reverse 1031 Exchanges

There are an inordinate number of issues that can be raised in a section 1031 exchange. What the IRS accomplished with document 2000-37 is to reduce the number of potential issues to avoid unnecessary litigation and bring a measure of security and predictability to investors.

Essentially, what this document says is that the IRS will not raise certain issues as long as investors (and their intermediaries) carefully observe the guidelines articulated in 2000-37. Revenue Procedure 2000-37 is aimed at reverse 1031 exchanges, and it discusses the creation of a qualified exchange accommodation agreement (QEAA) with the EAT during such an exchange. The QEAA is a contractual agreement that establishes a formal relationship between you and the EAT and provides clear proof of your intent to use the EAT as a safe harbor for a reverse exchange. Document 2000-37 states that a valid QEAA is created when six requirements have been fulfilled:

  1. The EAT has qualified indicia of ownership, such as a legal title or other principle of ownership, like a contract or deed.
  1. There is a clear intent to engage in a 1031 exchange by the taxpayer.
  1. There is a written agreement (the QEAA) executed with the EAT no more than five business days after the qualified indicia of ownership is transferred.
  1. The relinquished property is identified within 45 days after the transfer of qualified indicia of ownership of the replacement property.
  1. The sale of the parked property is completed no more than 180 days after the transfer of the property to the EAT.

The combined holding period for the relinquished property and the replacement property in a QEAA isn’t more than 180 days?it is possible to combine a reverse exchange with a deferred exchange for a maximum limit of 360 days under certain conditions. This would require additional liquidity in order to purchase the replacement property first.  If the relinquished property does not sell within 180 days of closing on the replacement property, then you will need to leave the cash in the replacement property. From there, you can use a forward 1031 exchange once your relinquished property closes.

Again, if these requirements are satisfied, then the IRS will not challenge either the qualification of the relinquished property or the replacement property for 1031 exchange purposes. Reverse section 1031 exchanges are noted for being somewhat more complex than traditional exchanges, so 2000-37 is designed to lessen the burden on investors. Of course, it is still possible for the IRS to raise other issues with a reverse exchange even if you observe the guidelines set forth in 2000-37, but this document certainly serves a useful purpose and promotes smoother transactions.

Limited Applicability of 1031 Safe Harbor Rules and Regulations

Although it is undoubtedly helpful, it is important to bear in mind that Revenue Procedure 2000-37 is technically not a law. It is not a statute or a binding regulation, it is merely the position taken by the IRS with respect to reverse 1031 exchanges. It is not something that must be observed by courts. It only states that the IRS will not challenge your exchange on two grounds?the qualification of either your relinquished or replacement property and on the validity of your EAT as a legitimate titleholder to your parked property?provided that you observe the requirements referenced by the IRS in 2000-37.

On the whole, Revenue Procedure 2000-37 is a very useful, straightforward document put forth by the IRS that brings simplicity and security to you and other investors. It is not groundbreaking or awe-inspiring, but it certainly does help to relieve some of the anxiety that can surround reverse exchanges, and it represents a welcomed gesture of support from the IRS.

Usually, the best thing to do when doing a reverse 1031 exchange is to work with a professional. CWS Capital Partners is a real estate investment management firm with expertise in 1031 exchanges, and we’re here to help. 

Please contact us to learn more about investing with CWS Capital Partners, or view our current offerings by completing our self-certification form for accredited or qualified investors.



The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.

All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.

Advisory services are provided by CWS Capital Partners LLC, a registered investment advisor.

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