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1031 Reverse Exchange

shutterstock_356165042Reverse Exchange Overview

A Reverse Exchange allows the exchanger to acquire property first and relinquish property after the acquisition. A Reverse Exchange allows an investor to acquire a new property when the market is at the most attractive point. Then the investor sells their other property later when the likelihood of securing a better price could possibly increase.

Reverse Exchanges hold many benefits for the investor because of their flexibility to taking advantage of changes in the marketplace. For a successful 1031 Reverse Exchange to happen, certain things must be in place, including:

The investor needs to have the funds to purchase the replacement property before the relinquished property is sold.

The investor cannot own both properties at the same time. Therefore one of the properties must be “parked”. Closely managing the ownership status of each property is a chief feature of a 1031 Reverse Exchange.

How 1031 Reverse Exchanges Work

A 1031 Reverse Exchange is a useful tool when a seller does not yet have a buyer for a piece of property that he wishes to sell and is afraid of losing the new property he wants to purchase.

In early 2000, the IRS issued a revenue procedure 2000-37 that established the concept of an Exchange Accommodation Title holder [EAT] and put forth the guidelines for the parking arrangement. A taxpayer may not have both the old as well as the new property titled in their name at the same time and still qualify for a 1031 Reverse Exchange.

1031 Exchange Synonyms

1031 Exchanges are referred to in a variety of ways. The most common terms you will hear are:

  • Authority IRC 1031
  • Method to Defer Tax on Profit [Gain]
  • Tax Deferred Exchange
  • Interest Free Government Loan

IRS Guidelines for 1031 Reverse Exchanges

IRS guidelines allow the taxpayer to acquire the new property before the old property is sold provided title is taken in the name of the exchange accommodation title holder(EAT) which is typically a limited liability company [LLC] which is created as a part of the 1031 Reverse Exchange. When this happens, the LLC [not the taxpayer] holds title until such time as the old property is sold.

As with all 1031 Reverse Exchanges, the old property must close within 180 days of the investor’s acquisition of title to the new property. Read more about the 180 Rule for 1031 Exchanges here (Link to Blog post).

Taking advantage of a 1031 Exchange

does NOT have to be complicated when you partner with the qualified intermediaries at the Exchange Authority, the leading experts in our field. We’ll patiently walk you through your options for taking full advantage of this tax deferral opportunity.

 

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