Petroleum Strategies

Standards Disclosure


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Exchange First (click here)

The Exchange Last is the most basic form of reverse exchange. In this form, an EAT is formed that will take title to and hold the New Property while the Exchanger finds a buyer for the Old Property and consummates a sale. If the Exchanger has enough cash to acquire the New Property without a loan, then the EAT will issue an interest-free note to the Exchanger for the purchase money and will enter into a rent-free triple-net Lease with the Exchanger that provides total access to the New Property. Identification of one or more candidate Old Properties must occur within 45 days and the sale of one or more identified properties must occur within 180 days. Once a sale is imminent, a simultaneous 1031 exchange agreement is executed in which the Exchanger, through the QI, is the seller of the Old Property to its ultimate buyer and the EAT is the seller, through the QI, of the New Property to the Exchanger. (The execution of the exchange agreement at the end of the reverse exchange process is the reason that this form is called “Exchange Last”). As part of the exchange, there is a settlement process in which the purchase price for the New Property is “paid” to the EAT by the Exchanger while exactly the same amount of money is used to retire the Note from the EAT held by the Exchanger. Exchangers may elect to either take direct title to the New Property or to take an assignment of all the interests in the LLC underlying the EAT.

If the Old Property cannot be sold in the 180-day exchange period, then the reverse exchange fails. In this case, the EAT will sell the New Property to the Exchanger “at cost” and use the funds to retire the Note. When an Exchange Last fails, the result is that the Exchanger owns both properties but there is no taxable event associated with the Old Property because no sale has occurred.

In many Exchange Last transactions, there is a third-party lender that supplies some of the purchase money for the New Property. If so, it is likely that there will be loan documents between the EAT and the lender in addition to the EAT’s note to the Exchanger. If the EAT executes third-party loan documents, there will typically be a guarantee provided to the lender by the Exchanger as well as a Deed of Trust, Mortgage or other security instrument. At the conclusion of the exchange, both the third-party loan and the note held by the Exchanger can be retired at settlement. However, it is far more likely that the lender will encourage or require that the loan to the EAT remain in place and that the Exchanger assume the interests in the LLC as a means of transferring ownership of the New Property.


Petroleum Strategies, Inc. does not give tax or legal advice. The information contained herein should not be relied upon as a substitute for tax or legal advice obtained from a competent tax and/or legal advisor.

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