Reverse exchanges appear to be gaining traction in the current real estate market after numerous years of dormancy. The reverse exchange differs from a typical “forward moving” delayed exchange in that the exchanger acquires their replacement property first, and thereafter sells their relinquished property. In order to properly structure a reverse exchange, the qualified intermediary forms an entity known as an Exchange Accommodation Titleholder (“EAT”), which is a limited liability company (“LLC”), to take title to the replacement property. The EAT acts as a “straw man” to hold title until the exchanger sells its relinquished property.
When the seller transfers the replacement property to the EAT’s LLC a transfer tax is due and payable. Once the exchanger sells its relinquished property, the EAT transfers the membership interest in the LLC, which owns the replacement property, to the exchanger. The transfer of this membership interest does not involve a change in beneficial ownership since the EAT was merely acting as a “straw man” to structure the reverse 1031 exchange, and does not generally involve the payment of a second transfer tax.
However, the taxpayer does need to be cognizant of potential costs for duplicate transfer taxes in certain jurisdictions. In a recent transaction, Legal 1031 sought guidance from the New Hampshire Department of Revenue Administration (the “NH DRA”) to confirm that the State would not levy a second transfer tax upon the transfer of the property from the EAT to the taxpayer. Legal 1031 put forth the position on behalf of our client that such transaction should not be subject to an additional tax levy, and ultimately the NH DRA concurred with our position. The NH DRA previously charged a duplicate transfer tax in all reverse exchanges until Legal 1031 vigorously advocated its client’s position that no duplicate transfer tax should be due.