Can I do a reverse exchange by acquiring a replacement property first?

A reverse exchange, where the new replacement property is acquired before the disposal of the original property, is possible, but it's a little trickier.  Until a few years ago, there were no official guidelines from IRS on how to properly structure a reverse exchange.  What we did was prepare full documentation of the exchange intention at the time of the replacement property acquisition.  The old property had to be disposed of within 180 days later and the proceeds used to pay off the loan for the replacement property.

What some other people did was use a parking strategy, where ownership of the new property was put into the name of an unrelated third party.  When the original property was finally sold, the proceeds were to be used to acquire the replacement property from the person who had parked it.

In late 2000, IRS issued safe harbor rules for reverse exchanges in which the replacement property is parked with a third party.  This is not the only way reverse exchanges can be structured; but it is the only way that can be guaranteed not to be challenged by IRS.  For more info on this.

When the IRS finally issued a safe harbor endorsement of how a reverse exchange can be structured and not be challenged as improper, they accepted the parking concept.  While they didn't say that the other documented approach was wrong, they have said that the only way that will automatically not be challenged is the use of some unrelated party to hold the property until the first property is disposed of. 

For this reason, we are recommending that you find a neutral unrelated person or company to buy the new property and hold it until you can close a sale on your old property.  You can loan the other party any funds needed to close the deal and cover any expenses incurred while it is parked.