The short answer
You pay them, but through the titleholder rather than in your own name. Rev. Proc. 2000-37 lets the titleholder lease the property to you, lets you manage it, and lets you lend or advance it funds and indemnify it against costs, all without losing the safe harbor. Most arrangements combine a lease or management agreement for the operating side with advances for anything the rents do not cover. The trade-off is that the titleholder, not you, is treated as the owner for federal tax purposes during the parking period.
At a glance
| Who bears the cost | You, through the agreements the safe harbor permits |
|---|---|
| Lease to you | Allowed, Rev. Proc. 2000-37 section 4.03(4) |
| You manage the property | Allowed, section 4.03(5) |
| Advances and loans | Allowed, section 4.03(3) |
| Indemnity | Allowed, section 4.03(2) |
| Federal tax owner | The titleholder, for the whole parking period |
| State and local treatment | May differ without breaking the safe harbor, section 4.04 |
Four permitted arrangements cover every carrying cost
Section 4.03 of Rev. Proc. 2000-37 lists arrangements that do not disqualify a parking 'regardless of whether such arrangements contain terms that typically would result from arm's length bargaining'. Four of them pay the bills.
Item 4 lets the titleholder lease the property to you or a disqualified person. Item 5 lets you manage the property, supervise improvements or act as contractor. Item 3 lets you loan or advance funds to the titleholder, and item 2 lets you guarantee its debt or indemnify it 'against costs and expenses.'
Because these terms need not be arm's length, a lease can be priced to cover exactly the titleholder's mortgage, taxes and insurance rather than market rent.
The same items work in an improvement exchange. Section 4.03(5) lets you supervise the construction and act as contractor, while your advances pay the builder, the construction lender and the builder's risk policy for the titleholder's account.
The usual pattern: you lease the building and run it
Under a master lease, you pay the titleholder rent sized to its loan payment and fixed costs, and you collect rents from the tenants as landlord under the lease. Operating expenses such as repairs and utilities are yours as tenant.
Where a lease does not fit, for example a vacant site under construction, a management agreement plus advances does the same job. You fund the titleholder's account and it pays the lender, the tax collector and the insurer, or you pay them on its behalf under the agreement.
Either way the documents should say who pays what, by when, and what happens to any surplus or shortfall when the property is transferred.
The titleholder reports the property for federal tax while it holds title
Section 4.02(3) requires a written agreement, signed within five business days of the acquisition, stating that the titleholder 'will be treated as the beneficial owner of the property for all federal income tax purposes,' and both parties must report consistently.
That means the parking-period income and expenses are reported on the titleholder's return under that agreement, not on your Schedule E as owner. Section 3.03 flags two open points: the IRS may recast payments under these arrangements as fees to the titleholder, and it has not decided whether a titleholder may claim depreciation.
Section 4.04 adds that state and local tax treatment may differ from the federal answer without breaking the safe harbor. Property tax bills, transfer taxes and state reporting follow local law.
Worked example: a parked fourplex with $5,100 of monthly fixed costs
Hypothetical, round numbers; run your own numbers with your CPA. The titleholder holds a fourplex with a $4,000 monthly loan payment, $800 of property tax and $300 of insurance. You sign a master lease at $5,100 a month.
The four tenants pay you $6,000 a month in total. You pay the titleholder $5,100, which it uses for the loan, tax escrow and insurance, and you cover repairs from the $900 difference. When a unit is vacant, your rent obligation does not change, so you fund the gap yourself.
On transfer, the lease ends and you become the owner in your own name. Your CPA reconciles the lease payments and any advances under the agreement.
Insurance and lender paperwork need the titleholder's name, not just yours
The titleholder is the legal owner, so confirm with the insurer that the property policy covers the titleholder's ownership interest and your interest as tenant or manager. A policy written only in your name, on a building you do not own, can leave a gap that nobody notices until there is a claim.
The lender's loan is to the titleholder with your guarantee, so payments must come from or for the titleholder and match the loan documents. Funding that arrangement is covered in who funds a reverse exchange purchase, and lender objections in the planned page on lenders that will not close with EAT title.
For the full sequence see the reverse exchange guide, and for the related deadlines when the 45-day clock starts.
Related questions
Can I live in the parked property while the titleholder holds it?
The safe harbor permits a lease to you, but personal use of a property meant to be held for investment raises a separate qualification question; see how long to rent before moving in.
Does the lease rent have to be market rate?
No. Rev. Proc. 2000-37 section 4.03 protects these arrangements even when the terms are not arm's length.
Who claims depreciation during the parking period?
Not you, because the titleholder is the federal tax owner. Whether the titleholder may claim it is an issue the revenue procedure expressly leaves open.
Can I pay the property tax bill directly?
You can pay on the titleholder's behalf if the agreement allows it. Keep the payment documented as an advance or lease obligation.
What if the rent does not cover the costs?
You fund the shortfall through advances under section 4.03(3) or your lease obligation, which is why the agreement should define both.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.