Liability and Property and Casualty Insurance Coverage Requirements for Reverse and Build-To-Suit 1031 Exchanges

Your Reverse and/or build-to-suit tax-deferred exchange transactions will involve a special purpose entity ("SPE") in the form of a single member limited liability company ("SMLLC") or other type SPE to be formed exclusively for the transaction.

The sole purpose of this SPE will be to function and serve as your Exchange Accommodation Titleholder ("EAT") that will acquire and hold or "park" title to either your relinquished or like-kind replacement property until your relinquished property can be sold.

Insurable Interest

This newly formed SPE serving as the Exchange Accommodation Titleholder will hold title to the designated property ("parked property") for up to 180 calendar days. The simple fact that the SPE is holding title to property as the EAT exposes the EAT to potential risk and liability as the legal property owner.

In order to protect the SPE serving as the EAT very specific liability and property and casualty insurance coverage is required to be paid in full and in place before any transaction can close. In addition, the evidence of insurance coverage such as an insurance binder must be reviewed and approved by the EAT prior to the actual closing.

The SPE serving as the EAT therefore has an insurable interest in the property and must be protected before any closing can occur. Evidence that the SPE serving as the EAT has been listed as the primary insured on the required insurance coverages must be approved by the EAT and in place prior to any closing.

Click here to learn more about the insurance requirements for reverse and build-to-suit tax-deferred exchange transactions.