Types of 1031 Parking Exchanges: Reverse, Improvement, and Combination Structures Explained

Not every 1031 Exchange follows the standard “sell first, buy later” sequence. In some cases, investors need to acquire or improve a property before selling their relinquished property—or temporarily “park” a property to meet IRS timing requirements.

That’s where parking exchanges come in.

Parking exchanges, also known as Exchange Accommodation Arrangements (EAAs), involve a third party known as the Exchange Accommodation Titleholder (EAT) who temporarily holds title to either the relinquished or replacement property. This structure allows investors to stay within IRS rules while maintaining the benefits of tax deferral under Section 1031.

Here’s a closer look at the three main types of parking exchanges: reverse, improvement, and combination exchanges.

What Is a Parking Exchange?

A parking exchange is an advanced 1031 strategy used when timing or construction needs make a traditional delayed exchange impossible.

Instead of the exchanger holding both properties at once (which would violate 1031 rules), the Exchange Accommodation Titleholder (EAT) temporarily “parks” one of the properties—either the one being purchased or the one being sold—until the rest of the transaction can be completed.

This arrangement is governed by Revenue Procedure 2000-37, which provides the safe harbor guidelines for Qualified Exchange Accommodation Arrangements (QEAA).

1. Reverse Exchange

A reverse exchange is used when an investor needs to acquire the replacement property before selling the relinquished one.

Because the IRS prohibits taxpayers from holding both properties simultaneously, the EAT takes title to either:

• The replacement property (most common), or

• The relinquished property (less common).

Once the relinquished property is sold, the exchange proceeds are used to purchase the parked property from the EAT—completing the transaction under Section 1031.

Benefits:

• Secures a desirable replacement property before it’s sold to another buyer.

• Allows flexibility when market timing or financing makes selling first impractical.

Timing Requirements:

• The relinquished property must be identified within 45 days.

• The entire exchange must be completed within 180 days from the date the EAT acquires the parked property.

2. Improvement (Build-to-Suit) Exchange

An improvement exchange—also called a build-to-suit exchange—allows an investor to use 1031 proceeds to improve, renovate, or build on a replacement property before taking title.

In this case, the EAT holds title to the replacement property during construction. The exchanger’s funds (held by the Qualified Intermediary) are used to complete improvements while the property is “parked.”

To qualify for full tax deferral:

• The improvements must be completed within 180 days.

• The exchanger must receive the improved property before the end of that period.

• The total value of the improvements plus the land must meet or exceed the value of the relinquished property.

Benefits:

• Enables customization of replacement properties to meet investment goals.

• Allows exchange funds to be used for construction before closing.

3. Combination Exchange

A combination exchange merges elements of both reverse and improvement structures. It’s used when the exchanger must acquire a property first (like a reverse exchange) and make improvements before completing the exchange.

For example, an investor might need to acquire land before selling their relinquished property and build a new structure within the 180-day exchange period.

In this setup, the EAT holds the property while construction is underway. Once the relinquished property is sold, proceeds are used to complete the transaction, and the exchanger receives the improved property.

Benefits:

• Combines timing flexibility with development potential.

• Provides an effective solution for complex transactions involving new construction or phased closings.

Role of the Exchange Accommodation Titleholder (EAT)

The EAT plays a central role in parking exchanges. As a temporary titleholder, the EAT ensures compliance with IRS rules by:

• Holding legal title to the parked property.

• Entering into a Qualified Exchange Accommodation Agreement (QEAA) with the exchanger.

• Transferring the property back to the exchanger once the exchange conditions are met.

The EAT works alongside the Qualified Intermediary (QI) to ensure all funds and property transfers comply with Section 1031 and Revenue Procedure 2000-37.

Making Timing Work in Your Favor

Parking exchanges provide investors with powerful flexibility when timing or development needs make a standard delayed exchange impossible. Whether through a reverse, improvement, or combination exchange, using an Exchange Accommodation Titleholder (EAT) allows investors to stay within IRS safe harbor rules while still achieving full tax deferral.

Disclaimer
This article is for informational purposes only and does not constitute legal or tax advice. Investors should consult a Qualified Intermediary, CPA, or tax attorney before proceeding with a reverse, improvement, or combination 1031 Exchange.