There are several scenarios which can create obstacles to a taxpayer's ability to meet the stringent timing requirements in exchange transactions for identifying Replacement Property within 45 days and closing on it within 180 days. For instance, if a taxpayer has specific structural or design specifications for their trade or business property where little or no suitable replacement sites are available, or where the taxpayer must close on Replacement Property before the sale of the Relinquished Property, the safe harbor exchange structure does not accommodate taxpayers' needs in such special situations. "Reverse" exchanges and "Build-to-Suit" exchanges are advanced exchange techniques a taxpayer may consider to accomplish a like-kind exchange when faced with these challenges.

Taxpayers electing to construct their own Replacement Property should consider implementing a "Build-To-Suit" exchange. A Build-To-Suit exchange is a Reverse exchange/parking arrangement where a third party acquires real estate and agrees to construct a building according to the taxpayer's design specifications. The taxpayer and the third party enter into a contract, which obligates the third party to sell the Replacement Property to the taxpayer at a specified price, either upon completion of construction or upon reaching a specified level or value of improvements at a certain time.

In a true Reverse exchange, the taxpayer would acquire the Replacement Property first and then exchange into the Replacement Property at the time of the sale of the Relinquished Property, reimbursing itself for funds expended earlier in the acquisition of the Replacement Property. However, this structure does not qualify under the §1031 safe harbors.
Although the IRS has not approved an exchange where the taxpayer takes title to the Replacement Property before conveying the Relinquished Property, a recent revenue procedure, Rev. Proc. 2000-37, has created a safe harbor method for taxpayers to use to structure a reverse exchange to fit the §1031 requirements. This method utilizes a parking arrangement with an exchange accommodation titleholder ("Accommodator"), who will acquire the Replacement Property on behalf of the taxpayer and hold it until the taxpayer is ready to exchange into the Replacement Property, qualifying under the safe harbor provisions of §1031.

Under the safe harbor, the arrangement is documented through a Qualified Exchange Accommodation Agreement. The types of third parties eligible to serve as Accommodator in the parking arrangement are limited much the same as the parties who may be a Qualified Intermediary. No related person should hold the property, as Accommodator, which includes certain family members, controlled entities, or agents of the taxpayer, such as his lawyers or accountants.

The taxpayer can fund the purchase or construction of improvements or guarantee the loan to the Accommodator. The taxpayer can manage construction of improvements on the Replacement Property or lease the property from the Accommodator. However, the Accommodator must be entitled to the benefits and burdens of ownership of the Replacement Property during the holding or parking period. To protect the taxpayer, the taxpayer and the Accommodator can also enter into an agreement for the sale of the Replacement Property to the taxpayer at a future date, at a specific price, upon the sale of the Relinquished Property, or completion of improvements in the case of a Build-To-Suit exchange (see diagram).

There are time limitations involved in this safe harbor. The whole reverse exchange by the taxpayer, including acquisition of the Replacement Property by the Accommodator, must be accomplished with 180 days. Further, the taxpayer must identify the Relinquished Property to the Accommodator within 45 days of the acquisition of the Replacement Property. The IRS recognized that certain parking arrangements and build-to-suits cannot be accomplished within the safe harbor time lines. In those instances particular care must be given to place as much distance and independence between the Accommodator and the taxpayer.

Taxpayers should not let the narrow time constraints of the safe harbors of the §1031 rules prevent them from utilizing the benefits of tax deferral through a like-kind exchange. By planning sufficiently beforehand, the taxpayer can implement a strategy to satisfy the safe harbors for exchange treatment and still fulfill all of the taxpayer's specifications for Replacement Property.

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