Category Archives: 1031 reverse exchanges

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.

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Challenges and Fixes to Identifying 1031 Replacement Properties…on 10/31

Challenges

Yesterday we looked at how to identify replacement 1031 properties as a continuance of my recent conversations with Michael on Rain City Guide from Team Reba. Today we look at identification difficulties. It’s only proper that our discussion of potential spooks and spills in 1031 exchanges comes on 10/31, the scariest day of the year! Hopefully you won’t be scared of helping clients and yourself identify replacement properties after this.

Over time our firm has observed three primary challenges to identifying properties within the allotted 45-day time period:

  1. Finding something of value in a changing market
  2. Obtaining the desired property before others do
  3. Finding property that would “pencil out” into a profit


 


 

 

To fix potential identification problems these four actions can help an exchanger

  1. Plan and Prepare by looking down the road to the property types you are interested in and their location. Once that is determined with your Realtor, you can start working with a Qualified Intermediary to plot out the steps necessary to see fruition of your goals.
  2. Seek to use all of the time available. You should always seek to maximize the time available to search for property. From a practical matter it isn’t too hard to double or quadruple the time and have three to six months available. No one can really change the 45-day identification period, but it can be extended by searching for replacement properties before you sell and even before you list the relinquished property. Talk to me and we can get some specifics hammered out for your situation.
  3. Tie up at least one of the properties identified by the 45th day in order to assure that you can get at least some bang for your buck. This would include signing a Purchase and Sale Agreement and putting down some earnest money.
  4. Consider a Reverse Exchange
    if necessary. What is a reverse exchange? It is an exchange where the new purchase is closed before the sale of the old property. It is useful in today’s real estate market because sellers are not willing to accept contingent offers and exchangers need more time to find suitable replacement property. We are doing 10 times the number of reverse exchanges today that we were doing a few short years ago.

    Why does it buy time? The IRS clock doesn’t start ticking until you buy replacement property, therefore you can spend all the time you want looking for it. Then the relinquished property can be put up for sale and you have 180 days to find a buyer and close on the sale.

Hopefully these tips can help you and your clients not fall prey to the ghostly pitfalls of the spooky 1031 Identification rules on this 10/31. Now go out and have fun trick or treating with your kids and be safe! A great 10/31 to you from The 1031 Like-Kind Exchange Blog!

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