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Reverse 1031 Exchanges: Buying the Replacement Property First

By Matthew Martinez, Founder, CEO & Managing Broker, Diamond Real Estate Group. California DRE #01869679.

A reverse 1031 exchange lets you buy the replacement property before you sell the property you are giving up, by having an exchange accommodation titleholder hold title to one of the two properties while you finish the other side. The IRS safe harbor for this, Rev. Proc. 2000-37, requires a written agreement within five business days, identification of the property you will sell within 45 days, and completion within 180 days. Because you cannot own both properties at once and still exchange, someone else must “park” one of them for you.

Reverse exchanges are less common than ordinary deferred exchanges because they cost more and need more cash or credit. They fit buyers who find the right property first, for example a vineyard, ranch or small apartment building in Sonoma or Napa that may sell to someone else before the buyer’s own property is ready to close. This page explains the rules, the two common structures, financing, California points and when the approach makes sense. Start with our California 1031 exchange guide if you are new to exchanges.

Why a reverse exchange needs a parking arrangement

The Treasury regulations on deferred exchanges cover the usual order: sell first, then buy within the deadlines. Rev. Proc. 2000-37 says plainly that “the deferred exchange rules under § 1031(a)(3) do not apply to reverse-Starker exchanges,” meaning exchanges where the replacement comes first.

To fill that gap, taxpayers began “parking” the property with an accommodation party treated as its owner for tax purposes. In 2000 the IRS created a safe harbor for these arrangements, called qualified exchange accommodation arrangements, for taxpayers with “a genuine intent to accomplish a like-kind exchange” who finish within a short period. If you meet its terms, the IRS will not challenge the accommodation party’s ownership or the property’s status as replacement or relinquished property. The safe harbor applies to arrangements in which the titleholder acquired its ownership interest on or after September 15, 2000.

The safe harbor rules in Rev. Proc. 2000-37

Requirement	What it means
Exchange accommodation titleholder (EAT)	Someone other than you or a disqualified person holds “qualified indicia of ownership” at all times. The EAT must be subject to federal income tax, or if a pass-through entity, more than 90% owned by taxable owners.
Qualified indicia of ownership	Legal title, other indicia treated as beneficial ownership under commercial law, or interests in a disregarded entity such as a single-member LLC.
Bona fide intent	When the EAT takes title, you intend the property to be part of a Section 1031 exchange.
Written agreement	Signed no later than five business days after the EAT takes title, stating that the EAT holds the property for your benefit and is its owner for federal income tax purposes.
45-day identification	The property you will relinquish is identified within 45 days after the replacement property goes to the EAT; alternative and multiple properties may be identified.
180-day completion	Within 180 days after the EAT acquires the parked property, it is transferred to you as replacement property, or to a buyer as relinquished property.
Combined limit	The relinquished and replacement properties together cannot be held in the arrangement for more than 180 days.

If a requirement is missed, the revenue procedure “does not apply,” and ownership is judged under general tax principles without it. The IRS also said it draws no inference about parking arrangements outside the safe harbor.

What the safe harbor allows

Rev. Proc. 2000-37 lists arrangements that do not disqualify a parking deal even if unrelated parties would not usually agree to them:

The EAT also serving as your qualified intermediary.
You guaranteeing or indemnifying the EAT’s obligations, or lending or advancing it funds.
The EAT leasing the property to you, and you managing it or supervising improvements.
Puts and calls at fixed or formula prices lasting no more than 185 days.

The 2004 limit: no parking property you already own

Rev. Proc. 2004-51 modified the safe harbor so it does not apply to replacement property held in an arrangement if you owned that property within the 180 days ending on the date the EAT takes title. You cannot sell your own land to an accommodator and then “exchange” into it. If your plan involves building on land you or a related party already own, talk to your tax adviser early; our improvement exchange guide covers build-to-suit exchanges.

Exchange-first and exchange-last structures

The EAT can hold either property. Which one it holds usually comes down to financing.

Structure	What the EAT holds	How it finishes	Typical fit
Park the replacement (often called exchange-last)	The new property, bought with your loan or advance to the EAT	When your old property sells, sale proceeds pay down the advance and the EAT transfers the new property to you	Buyers with cash, a credit line or a lender willing to lend to the EAT
Park the relinquished property (often called exchange-first)	Your old property	You take title to the new property right away, completing the exchange; the EAT later sells the old property	Buyers who need conventional financing in their own name on the new property

Terms vary by provider, and intermediaries do not all use the labels the same way, so read the agreement rather than the label. When the old property is the one parked, IPX1031 notes that the equity in the new property must match the equity expected from the sale before the new purchase closes, since there are no sale proceeds yet.

Deadlines in a reverse exchange

The clocks start when the EAT takes title, not when you sell.

Day 0: The EAT acquires the parked property.
By business day 5: You and the EAT sign the written accommodation agreement.
By day 45: You identify the property you will relinquish, in writing.
By day 180: The relinquished property is sold and the parked property is transferred, closing out the arrangement.

The 180 days do not stretch. If your old property has not sold by then, the safe harbor is gone for that arrangement, so a listing that takes months to sell is the main risk. Price and prepare the relinquished property before the EAT buys, and use our 1031 deadline calculator to map the dates. The identification rules for ordinary exchanges are explained in our identification rules guide.

Financing: the hardest part

A reverse exchange means carrying two properties for up to six months. Rev. Proc. 2000-37 lets you lend money to the EAT and guarantee its obligations, which is how many reverse exchanges are funded. Third-party lending is harder: the intermediary IPX1031 notes that few lenders will lend when an intermediary or accommodation titleholder is on title, which is why some exchangers park the old property instead.

Questions to settle before you commit:

Will your lender lend to the EAT’s single-member LLC, with your guarantee, and on what terms?
Can you carry both properties’ debt service, taxes and insurance until the sale closes?
If you are buying farmland or a vineyard, does the agricultural lender accept the structure? Our vineyard financing guide covers the lender types.
For apartment buildings, see our guide to apartment building loans for how commercial lenders treat entity borrowers.

Diamond may refer you to partners we work with; you’re free to choose any provider.

California points to check

California adopts the federal rules on gain or loss from property dispositions, including Section 1031, under Revenue and Taxation Code section 18031, so a valid exchange defers state tax too. A few state steps still apply:

Withholding on the sale. Form 593 treats a deferred exchange as exempt at the initial transfer, but if you receive more than $1,500 in cash or other property from the sale, the intermediary withholds on it, and a failed exchange triggers withholding of 3 1/3% of the sales price or an alternative amount based on the gain. Our Form 593 guide explains the certificate.
Out-of-state replacement. If the property you are selling is in California and the replacement is elsewhere, you file Form FTB 3840 every year until the deferred gain is recognized; see our California clawback guide.
Two transfers, two recordings. A parking arrangement adds a deed to or from the EAT. Ask your escrow officer how recording costs and documentary transfer tax apply to each transfer, and ask your county assessor or title officer how the parking transfer is treated for property tax.

When a reverse exchange makes sense

In our markets the typical case is a buyer who finds the right vineyard, ranch or building and cannot wait. Many sellers prefer an offer that does not depend on the buyer selling another property first, and a reverse exchange lets you make that kind of offer, close on time and then sell.

It tends to work when:

You can fund or finance the purchase without the sale proceeds.
The property you are selling is ready to list, priced realistically, and likely to close well within 180 days.
The fees and carrying cost are small next to the tax you would otherwise pay.

It is a poor fit if your current property is hard to sell, has tenants or title issues that could slow escrow, or needs work before listing. If you are selling a rental, our guide to selling a rental property in California covers preparation, and for farmland buyers our guide to buying a vineyard and our page on 1031 exchanges for vineyards and ranch land cover the purchase side.

Costs vary by provider and deal. Expect EAT and intermediary fees, entity setup, extra escrow and title charges, and the carrying cost of two properties, and get a written fee quote before you sign.

This is general information, not legal or tax advice; talk to a California tax adviser or CPA and a real estate attorney about your exchange.

Questions people ask

What is a reverse 1031 exchange?

An exchange in which you acquire the replacement property before selling the relinquished property. An exchange accommodation titleholder holds title to one of them under Rev. Proc. 2000-37 until the exchange is completed.

How long do I have to sell my property in a reverse exchange?

You must identify it within 45 days after the EAT acquires the parked property and complete the transfers within 180 days. The two properties together cannot be held in the arrangement for more than 180 days.

Can I do a reverse exchange with property I already own?

Not under the safe harbor. Rev. Proc. 2004-51 says it does not apply to replacement property you owned within the 180 days before the EAT takes title.

Who can be the exchange accommodation titleholder?

Anyone other than you or a disqualified person who is subject to federal income tax. Many qualified intermediaries offer EAT services, and title can be held through a single-member LLC. See our qualified intermediary guide.

Can I get a loan for a reverse exchange?

Often, but it takes planning. You can lend to or guarantee the EAT, and some lenders will lend to the EAT’s LLC with your guarantee; others will not, which is why some exchangers park the old property instead.

What happens if my property does not sell within 180 days?

The arrangement falls outside the safe harbor, and whether any deferral survives becomes a question of general tax principles, which is uncertain. Talk to your tax adviser well before the deadline about your options.

Can I receive cash in a reverse exchange?

Cash or other property you receive is boot and is taxable to the extent of your gain; our guide to boot and partial exchanges explains how it is counted.

If you have found a replacement property before your own sale is ready, we can help you plan the sale timeline and work with your intermediary and CPA. See how Diamond works with investors, or contact us about a specific property.

Sources & notes

Last reviewed October 2026 by Matthew Martinez.