Tax Guru – Ker$tetter Letter

Reverse Exchanges Finally Have IRS Guidelines

Delayed like kind (aka Starker & 1031) exchanges were legalized in 1984. You can see all the rules at Tax Free Exchange Corporation’s website.

IRS likes to take its sweet time in issuing regulations on how laws are to be applied. This has been the case with reverse exchanges, where the replacement property is acquired before the original one is disposed of. IRS still hasn’t issued official regulations; but they did finally approve of a safe harbor approach to structuring such transactions. Basically, it involves parking the replacement property with a neutral third party prior to disposing of the original property. It is not the only way reverse exchanges can be handled; but it is the safest way to avoid any IRS challenge.

This safe harbor was published by IRS as Revenue Procedure 2000-37 in its Internal Revenue Bulletin 2000-40. You can download the entire 29 page IRB from IRS’s website or just the three pages with the Rev. Proc from my site.

I will be expanding on my interpretation of this new procedure in the near future.