Reverse 1031 Exchange Flowchart

Visual guide to understanding reverse 1031 exchanges - when you need to buy before you sell

Reverse 1031 Exchange: Complete Process Guide

When you need to buy your replacement property before selling your current one

In a competitive real estate market, you sometimes find the perfect replacement property before you've sold your current one. A reverse 1031 exchange allows you to acquire that property first while preserving your tax-deferred status—but it's significantly more complex (and expensive) than a standard forward exchange.

What is a Reverse 1031 Exchange?

A reverse 1031 exchange (also called a "reverse Starker exchange") is a tax-deferred exchange where you acquire your replacement property BEFORE selling your current property. This is the opposite of a standard "forward" 1031 exchange.

Because IRS rules prohibit you from owning both properties simultaneously during an exchange, a special structure is required: the Exchange Accommodation Titleholder (EAT).

How it works:

  • •Your Qualified Intermediary establishes an EAT entity
  • •The EAT acquires and holds ("parks") your replacement property
  • •You have up to 180 days to sell your current property
  • •When the sale closes, the QI uses proceeds to purchase the replacement property from the EAT
  • •The EAT transfers title to you, completing the exchange

When You Need a Reverse Exchange

Consider a reverse exchange when:

  • You've found your ideal replacement property but haven't sold your current property yet
  • The replacement property won't wait—seller demands quick closing
  • You're in a competitive market and need to make a non-contingent offer
  • You want to lock in a great opportunity before it's gone
  • You can afford dual carrying costs (both properties) for 90-180 days

NOT recommended when:

  • You have time to sell your current property first (forward exchange is simpler and cheaper)
  • You can't afford $10,000-$30,000+ in additional costs
  • You can't qualify for financing on the replacement property
  • Your replacement property value is under $500K (costs may not justify benefits)

Reverse vs Forward Exchange Comparison

FeatureForward ExchangeReverse Exchange
OrderSell first, buy secondBuy first, sell second
Timeline StartsWhen you close sale of current propertyWhen EAT acquires replacement property
45-Day RuleIdentify replacement properties to buyIdentify properties to sell
180-Day RuleClose on replacement propertyClose on sale of current property
QI RoleHolds sale proceedsEstablishes EAT entity
Property ParkingNot requiredRequired (EAT holds replacement)
Dual Carrying CostsNo (only one property at a time)Yes (both properties during parking)
ComplexityModerateHigh
Typical Costs$1,000 - $3,000 QI fees$10,000 - $30,000+ (QI + EAT + carrying costs)
Best ForStandard scenarios with time flexibilityCompetitive markets, must act quickly

The Reverse Exchange Process: Step-by-Step

The flowchart below shows the complete reverse exchange timeline with two parallel tracks: the replacement property acquisition and parking (top), and your current property sale (bottom).

Replacement Property Track

1

EAT Setup & Replacement Property Purchase

Week 0 (Before Day 0)

Engage QI, establish EAT entity, and acquire replacement property through EAT

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2

Parking Period - EAT Holds Replacement Property

Days 1-180

EAT holds replacement property while you prepare to sell current property

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Dual Timeline: Both Properties During Parking Period

Property Sale Track

3

Identify Property to Sell

Within 45 Days

Critical Deadline: 45 days from replacement property closing

Identify which property(ies) you will sell as part of the exchange

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4

Sell Current Property

By Day 180

Critical Deadline: Day 180 from replacement property closing

Complete sale of current property to fund the exchange

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5

Exchange Completion & Title Transfer

At Sale Closing

QI facilitates exchange and transfers replacement property to you

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6

Tax Reporting & Compliance

Following Tax Year

File required tax forms and maintain compliance

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EAT Structure Explained

Investor

EAT

Exchange Accommodation Titleholder

Replacement

Property

Current

Property (To Sell)

EAT holds title to replacement property. Investor leases it during parking period (up to 180 days).

Key Points:

  • •The EAT is NOT you—it's a separate legal entity
  • •You don't own the replacement property during parking (the EAT does)
  • •You control the property via lease agreement, but don't have title
  • •This structure satisfies IRS rules while allowing you to secure the property

Why is an EAT Structure Required?

The Problem:

The IRS prohibits you from owning BOTH the current property and replacement property simultaneously during a 1031 exchange.

The Solution:

Exchange Accommodation Titleholder (EAT)

The EAT is a special-purpose entity established by your Qualified Intermediary specifically to hold title to your replacement property temporarily. Think of it as a temporary parking space for your new property.

How it works:

  1. 1Your QI creates the EAT entity (usually an LLC)
  2. 2You provide funding to the EAT (often via a loan structure)
  3. 3The EAT uses those funds to acquire the replacement property
  4. 4The EAT holds legal title for up to 180 days (the "parking period")
  5. 5During parking, you typically lease the property from the EAT
  6. 6You pay all property expenses (mortgage, insurance, taxes, maintenance)
  7. 7When your current property sells, the QI uses the proceeds to "buy" the replacement property from the EAT
  8. 8The EAT transfers title to you, completing the exchange

Key Points:

  • •The EAT is NOT you—it's a separate legal entity
  • •You don't own the replacement property during parking (the EAT does)
  • •You control the property via lease agreement, but don't have title
  • •This structure satisfies IRS rules while allowing you to secure the property

Understanding Reverse Exchange Costs

Reverse exchanges are significantly more expensive than forward exchanges due to the EAT structure, additional legal complexity, and dual carrying costs.

Typical Cost Breakdown:

QI Base Fee$3,000 - $8,000+
EAT Setup Fee$2,000 - $5,000
Legal Fees$2,000 - $5,000+
Dual Carrying Costs (3-6 months)$3,000 - $12,000+
Total Estimated Cost$10,000 - $30,000+

When costs are justified:

  • Replacement property value > $1M
  • You're saving a deal that would otherwise fall through
  • Capital gains tax savings far exceed exchange costs
  • Strategic property acquisition justifies premium

Additional Resources to Review

Reverse exchanges require careful planning. Use these resources to understand all exchange types and find experienced professionals:

Improvement Exchange Flowchart

Learn about build-to-suit exchange structures

Exchange Type Selector

Determine if reverse exchange is right for you

Capital Gains Tax Deferral Calculator

See if reverse exchange costs are justified by tax savings

QI Vetting Checklist

Find a QI experienced with reverse exchanges

Find an EAT Specialist

Connect with Exchange Accommodation Titleholders