Reverse 1031 Exchanges 101

When is a Reverse Exchange Used?

In a forward 1031 like-kind exchange you usually sell your relinquished property first, then buy your replacement property later. A reverse exchange is used if you find your new replacement property and must close on it before you can sell and close on your old property. It has more steps and legal documents than a normal forward exchange and involves more processing time and fees, but is very useful.

What is the IRS’s Position on Reverse Real Estate Exchanges?

The IRS issued Revenue Procedure 2000-37 (Rev Proc) in September 2000 that gives taxpayers guidance on Reverse 1031 Exchanges. A “Safe Harbor” Reverse Exchange introduces a new entity into the reverse process-an Exchange Accommodation Titleholder (EAT). Under these guidelines we set up a new single member limited liability company (LLC) for use specifically in your reverse exchange. It then takes temporary title to one of the two properties since you cannot hold title to both properties at the same time and do an exchange.

How does a Reverse Exchange Generally Work?

The new LLC takes title to, or holds the property, until you are able to sell the old property.

The normal 1031 time restrictions apply so you must identify the old property you are going to sell 45 days from closing the new purchase and you must sell the old property within 180 days of closing the purchase.

The LLC may hold title to either the relinquished property (the old property) or the replacement property (the new property) but not both.

Before the reverse process begins, a Qualified Intermediary should review with you the two types of reverse exchanges. Depending on your individual situation and the state in which the properties are located there may be different compelling reasons for the Qualified Intermediary to prefer to temporarily take title to either the new replacement property or old relinquished property. In most cases, they prefer to hold title to the replacement property you are buying as it is easier to avoid paying state transfer and excise taxes twice.

How does a Reverse 1031 Exchange Generally Work?

Below are the general steps to a Reverse 1031 Exchange. 

  1. Purchasing the New Property
    1. Contract Stage
    2. Financing Stage
    3. Closing Stage
  2. Selling the Old Property
    1. Identify the Old Property to be Relinquished
    2. Contract Stage
    3. Closing Stage
    4. Pay Off Stage
  3. Transferring Title / Funds
    1. Exchanger assumes title that was held to the Replacement Property by the EAT
    2. Special Documents
    3. Final Proceeds
    4. Time Frame
    5. Summary Letter

Next Steps 

Since a reverse exchange can be more difficult to understand, we would welcome an e-mail (chad at 1031eci dot com) or call (425.644.1031) so we can go over it more thoroughly with you where we can discuss the pros and cons of a reverse 1031 exchange to help you determine whether it is right for you and your situation.



Filed under 1031 reverse exchanges

3 responses to “Reverse 1031 Exchanges 101

  1. Pingback: Reverse 1031 Exchanges 101 Updated « 1031 Like-Kind Exchange Blog

  2. Cindy

    Thanks for your blog – very timely. We are selling a 2 acre lot (originally purchased to build our home). We decided to sell and want to 1031 the money into another “like kind” property. The burning question for us is… could this be used to purchase commercial real estate? Sounds like the answer is no, that it would have to be another lot to be considered “like kind”. Thanks! C

  3. Insight into these kinds of transactions is always helpful. Being knowledgeable and motivated are key to surviving in today’s more difficult market conditions. Don’t you agree that putting both of these halves together is the ingredients of success??

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