DEFINITION of 'Reverse Exchange'

A type of property exchange wherein the replacement property is acquired first, and then the current property is traded away. Reverse exchanges were created in order to help buyers who found a new property that they would like to purchase before they were able to trade in a current property.

The opposite of a reverse exchange is a deferred exchange.

BREAKING DOWN 'Reverse Exchange'

Standard like-kind exchange rules usually do not apply to reverse exchanges. The IRS has created a set of safe-harbor rules that allow for like-kind treatment, as long as either the current or new property is held in a qualified exchange accommodation arrangement (QEAA).

Reverse exchanges apply only to Section 1031 property. Section 1245 or 1250 property is ineligible for this type of transaction.

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