Reverse 1031 Exchange

In a Reverse 1031 Exchange , the replacement property is obtained before trading away the current property. Reverse 1031 exchange is organized to assist buyers who have already identified a new property which they are interested in purchasing before they trade in or sell a current property. This arrangement allows a seller to hold an existing property until its market value improves, thereby also extending their own timing to trade for maximized profit. Investors can efficiently analyze real estate trends and marketplace innovations to enhance investment opportunities by taking benefit of either a reserve or a delayed or referred exchange. Usually, the maximum holding period averages around 180 days.

GET 1031 EXCHANGE PROPERTIY LIST
 

The opposite of a reverse 1031 Exchange is the standard 1031 delayed or deferred exchange, in which the exchanger needs to relinquish owned property first by trading or selling prior to acquiring new property.

Reverse exchanges only apply to Section 1031 property; hence it is commonly referred to as a 1031 Exchange . Section 1031 properties are properties that businesses or those with qualifying organizations trade to defer paying taxes on any profit realized from their sale. However, it’s not as manageable as an individual taxpayer acquiring one property, selling it, then using the gains to obtain another property; instead, a set standard of exchange is mandatory, and there is a need of a facilitator to establish the process. Section 1245 or 1250 properties are unfit for this type of transaction.

Sometimes an investor wanting to initiate a 1031 Exchange will have an opportunity to identify and acquire replacement property before selling the property to be relinquished. Since IRS regulations prohibit a seller from engaging in a swap for property that is already owned, this builds something of a dilemma for the investor. The difficulty is resolved by a reverse 1031 exchange.

How You Can Complete Your 1031 Exchange In Six Simple Steps

Simple Steps

HOW CAN WE HELP?

  • Provide complete assistance for your 1031 Tax Deferral Exchange.
  • Connect you with a 1031 Expert who stays with you throughout the transaction.
  • Help you with fund transfer/documentation etc.
  • Work hand in hand with your attorney, accountant or closing agent for ensuring that the transaction runs smoothly.
 

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

Exchanger loans/advances funds to the EAT.

EAT acquires the replacement property on Exchanger’s behalf.

The seller creates a deed of the replacement property to the EAT.

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

Relinquished property is deeded to the EAT and replacement property to the Exchanger.

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

According to the QEAA, Exchanger deeds the relinquished property to the EAT.

Concurrently, the EAT and the Exchanger begin an Exchange Agreement.

Exchanger loans/advances funds to the EAT for the purchase of the replacement property.

In compliance with the Exchange Agreement, replacement property is deeded directly to the Exchanger.

STEP 2 – Sale of Relinquished Property

Exchanger locates a purchaser for relinquished property and enters into a contract.

Exchanger assigns the lease to EAT and EAT sells relinquished property to Buyer.

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 – 888-993-2835 or email us at info@1031xchange.com.

“Our tax-deferred 1031 exchange programs can save millions in taxes, increase investor equity, and compound annual cash flow distributions and returns”