How to organize a Reverse 1031 Exchange
A very crucial aspect to successfully complete a reverse exchange is the availability of funding to the investor for the new purchase. As the new property will not have been relinquished at the time of the transaction, the investor needs to provide the full finding of the new property without it. Acquisition of the new property can also be managed by the assistance of a lender. However, the lenders willing and able to work with a reverse exchange investor are very few.
The IRS has sketched “safe harbor” methods in which a taxpayer can use an Exchange Accommodation Titleholder (EAT) to avoid technically holding the replacement property before the sale of the relinquished property, which is also referred to as parking. The Qualified Intermediary is accountable to establish the EAT and squares the property for the taxpayer by allowing the EAT take title to it. The EAT holds on to the replacement property until the relinquished property has been sold.
To be eligible for the IRS safe harbor, the relinquished property needs to be sold within 180 days from the day the EAT accepts title to the replacement property–and title on the replacement property must be communicated to the taxpayer within that time frame. Same is the case with the relinquished property. The property to be relinquished needs to be identified within 45 days from the day EAT successfully purchase a replacement property. Non-safe harbor reverse 1031 Exchanges are also permitted.
These below mentioned steps will make it easier to understand the process of a 1031 Reverse Exchange:
STEP 1 – Eat Purchase of a Replacement Property
1. Exchanger loans/advances funds to the EAT.
2. EAT acquires the replacement property on Exchanger’s behalf.
3. The seller creates a deed of the replacement property to the EAT.
4. EAT then leases the replacement property further to the Exchanger.
STEP 2 – Sale of Relinquished Property and Exchange of the Replacement Property to The Exchanger
1. Relinquished property is deeded to the EAT and replacement property to the Exchanger.
2. The Original loan/advance is paid off from the Exchanger from sale proceeds.
In the case of relinquished property:
RELINQUISHED PROPERTY PARKED
STEP 1 – Exchange of Relinquished Property For The Replacement Property
1. According to the QEAA, Exchanger deeds the relinquished property to the EAT.
2. Concurrently, the EAT and the Exchanger begin an Exchange Agreement.
3. Exchanger loans/advances funds to the EAT for the purchase of the replacement property.
4. In compliance with the Exchange Agreement, replacement property is deeded directly to the Exchanger.
STEP 2 – Sale of Relinquished Property
1. Exchanger locates a purchaser for relinquished property and enters into a contract.
2. Exchanger assigns the lease to EAT and EAT sells relinquished property to Buyer.
3. EAT receives proceeds from the sale and pays off an advance/loan from Exchanger.
1031 Exchange enables your money to churn the maximum profit for you. However, the exchange process is extremely complex in nature and it would be wise to seek guidance from expert professionals. We have an extensive experience of handling highly profitable exchanges for our varied client base.
For consultation and assistance regarding 1031 exchange call – 888-993-0590 or email us at info@1031xchange.com.
