Reverse Exchanges Done Right
What does it mean to do reverse exchanges right? Although IRS Rev. Proc. 2000-37 provides the necessary guidance on the structure of safe harbor reverse exchanges, there is nothing formal that proscribes the various and detailed aspects of the execution of reverse exchanges. Ultimately, there is no authority on correct reverse exchange execution.
Potential Exchangors who are looking closely at various Accommodators will be surprised by the lack of consistency in execution. Many Accommodators use outdated reverse exchange documents that do not reflect current best practices, IRS activity and legal results. Many accommodators cut every possible corner to avoid cost and reduce the time expended. Some Accommodators spend an inordinate amount of time collecting information that serves only to reduce their risk of being sued by the Exchangor, who is their client. Many Accommodators view reverse exchanges as “loss leaders” or a “necessary evil” and do them reluctantly after steering their potential clients toward delayed exchanges, irrespective of the optimal exchange strategy. With all of this, it is inevitable that many Exchangors come to believe that reverse exchange execution is very mysterious and complex and something to be avoided.
This is where ExStra’s unique approach to reverses is most apparent. ExStra provides a highly developed core competency in reverse exchange execution to Exchangors of all types. We have systematically removed the mystery from how reverses work and invested heavily in processes that reduce ‘complexity’ to a series of actions and communications that are effectively managed by an ExStra Exchange Officer. And, we always take the approach that our clients are our customers and not our adversaries. We are here to provide an elevated level of service, as described below, that helps Exchangors defer taxes on investment assets. We work hard to reduce the risks associated with reverse exchanges for our clients. We work hard to share information that is useful and in a form that makes it more useful. We want our clients to come to us for all their 1031 exchanges – even though we’ll refer the delayed exchanges to a partner – because we have proven to be a resource that adds value. And, we can show that reverse exchange economics are often superior to those of delayed exchanges. Click here for more on economics.
We have invested heavily in reverse exchange processes that are carefully structured to bring value to clients. We ensure complete and timely exchange execution while masking unnecessary complexity. We believe, based on the criteria listed below, that our processes are superior to any others. We also believe that our approach to execution constitutes a de facto standardas to how reverses ought be done. This is “Reverse Exchanges Done Right”.
The criteria that constitute this standard are as follows:
- Compliant exchange mechanics that reduce risk of successful challenge
Exchange processes should be regularly subjected to review by independent 1031 exchange authorities in order to assure that they reflect not only full compliance with IRS regulations but also the dynamic body of new information coming from court actions, IRS actions (e.g. PLRs) and other important sources. - A comprehensive Standard of Care that ensures a valid exchange
For each exchange, consistent execution of a detailed process for collecting data, determining strategy, creating documents, forming LLCs, managing deadlines, transferring title, communicating results, etc. is critical to ensure that the desired result (deferral of tax) is achieved and that, in the unlikely event of an audit by the IRS, the chances of a successful challenge are minimized. - A Service Level Commitment that specifies and ensures responsiveness
At each step, the Accommodator should respond aggressively and completely. At critical junctures, responsiveness should be measured in minutes and hours. - Exchangor risk mitigation
Specific provisions in the exchange documents and specific steps in the processes are designed to reduce the Exchangor’s risk – risks can come from documents that do not satisfy IRS requirements, from missing the 45 and 180 day deadlines, from improper use of LLCs, from improper liability insurance and so on. Each opportunity to reduce the risk of the Exchangor should be built into the Standard of Care and executed according to the Service Level Commitment. - Leverage all information to the benefit of the Exchangor
The information collected and derived in the course of a reverse exchange can be important to Exchangors and their tax professionals. Providing information in this manner is not providing tax advice (which we never do) but it does add value by enabling Exchangors to more quickly and accurately satisfy their filing requirements and by providing visibility into state-wise differences in the treatment of reverse exchanges and the consequences of a particular exchange.
Why is all this important? It’s simple, really. Why go through the expense of time and money to do a reverse exchange if a failure to execute properly is going to create risk for you later on, sometimes much later? Why not be confident that all the steps – both necessary and highly advisable - have been taken on your behalf?
Expense is a factor, of course. Expense is always to be weighed against risk. And, expense is always relative. ExStra is a bit more expensive than the lowest-priced accommodators and not as expensive as many others. We’ll match our processes with any other Accommodator for accuracy, thoroughness, responsiveness and value. We are committed to excellence in reverses because it is all we do. We provide confidence to Exchangors that they seldom get from other Accommodators at any price. Why not get the best?