Who Holds the Deed While You Wait? Inside the Parking Arrangement

In a reverse 1031 exchange you buy before you sell. That creates a problem the tax rules will not overlook: you cannot own both the relinquished and the replacement property at the same time and still call it an exchange.

The solution is parking. Someone else takes title temporarily. Understanding who that someone is, and what the rules require of them, explains why reverse exchanges cost more and demand more discipline than ordinary ones.

What is an Exchange Accommodation Titleholder?

An entity, usually a special purpose subsidiary formed by your Qualified Intermediary, that takes and holds legal title to the parked property.

It is normally a single member LLC created for your transaction. It holds title, is the named owner on the deed, and transfers the property to you when the exchange completes.

What is the safe harbour?

The IRS set out a safe harbour for these arrangements in Revenue Procedure 2000-37. If the arrangement follows it, the IRS will not challenge the accommodation titleholder's ownership of the property.

Key features include a written qualified exchange accommodation agreement entered into within a short period after title is acquired, commonly five business days, and a requirement that the whole arrangement complete within 180 days.

The agreement must state that the property is held for the purpose of facilitating an exchange and that both parties will report consistently.

Which property gets parked?

The replacement property. The accommodator takes title to the property you are buying, and holds it until your sale completes. You keep operating your existing property normally. This is the more common approach.

The relinquished property. The accommodator takes title to the property you are selling, and you buy the replacement directly in your own name. This is used when a lender will not lend to an accommodation titleholder on the new property, which is common.

Your lender frequently decides which structure is used.

What deadlines apply?

The same 45 and 180 day periods, measured from the date the accommodator acquires the parked property.

• ›45 days to identify the property that will be relinquished
• ›180 days to complete the entire arrangement, including your sale

In an ordinary exchange, 180 days is time to buy. In a reverse exchange, it is time to sell, which depends on finding a buyer at an acceptable price.

Who runs the property while it is parked?

Typically you do, under a lease or management agreement with the accommodator. You usually collect the rent, pay the expenses and handle operations, while the accommodator holds bare legal title.

That arrangement needs documenting properly. The accommodator is the owner for the period, and the paperwork should reflect the intended tax treatment.

What about financing?

This is the most common practical obstacle. Many lenders will not lend to an accommodation titleholder, or will require personal guarantees and additional documentation. Loans often need to be structured so the accommodator is the borrower with your guarantee, or so the debt is placed on the other property.

Speak to your lender before committing to a reverse structure. Financing decides whether the arrangement is possible at all.

What does it cost?

Considerably more than a delayed exchange. Accommodator fees for parking arrangements commonly run several thousand to well over ten thousand dollars, plus entity formation, additional legal work and possible extra transfer taxes depending on state law.

What happens if the sale does not complete in time?

The arrangement unwinds. Title to the parked property transfers to you, the exchange fails, and the eventual sale of your old property is taxable. That is the central risk of the structure.

How does the accommodator's ownership end?

When your relinquished property sells, the proceeds flow to the Qualified Intermediary, and the accommodator transfers the parked property to you. If the relinquished property was the parked one, the accommodator sells it to your buyer and the proceeds are used for the replacement you already acquired.

Either way, the transfer must happen inside the 180 day period. Deeds, entity dissolutions and loan assignments all take time, so the mechanics should be prepared well before the deadline rather than assembled in the final week.

What are the common mistakes?

• ›Missing the five business day window to sign the qualified exchange accommodation agreement after title is acquired
• ›Assuming a lender will cooperate without asking first
• ›Underestimating how long the sale will take, which is the single largest cause of failure
• ›Ignoring transfer taxes, which some states charge on both the parking transfer and the final transfer
• ›Poor documentation of operations during the parking period, such as rent and expenses being handled inconsistently with the structure

What to do first

Before committing, get three answers: whether your lender will work with the structure, how long your property will realistically take to sell, and what the accommodator charges. Then build the timeline backwards from day 180 with margin, because the sale is the part you control least.

Nothing here is tax, legal or investment advice. Parking arrangements are technical. Confirm your plan with your CPA, attorney and Qualified Intermediary before acting.