As the name implies, a 1031 Reverse Exchange is the opposite of a 1031 Delayed/Forward Exchange. In a Reverse Exchange, new replacement property is acquired before the investor sells their old relinquished property. While this structure is more complex than a Delayed/Forward Exchange (sell first, purchase second), it gives investors added flexibility for tax deferral when planning their investment strategies.
To ensure a successful Reverse Exchange, here are some key steps to keep in mind:
- Plan Ahead – A Reverse Exchange is more complex than a Delayed/Forward Exchange, so contact IPX1031® and your tax advisor as soon as possible.
- Closing – Do NOT close on any property without discussing the transaction with IPX1031® first. A Reverse Exchange MUST be set up and structured prior to any closing.
- Lenders – If the investor is borrowing money to close on the replacement property, the loan is actually made to the 1031 Company, with the Exchanger guaranteeing it. Some lenders are not familiar with or unwilling to lend on this type of structure, so it’s important to start those discussions early in the transaction.
- Cost – Reverse Exchanges are complex and incur more liability than a Delayed/Forward Exchange and hence have higher fees. To ensure that the cost of the Reverse Exchange transaction is a viable solution, review the amount of depreciation recapture and capital gains tax being deferred.
- Improvements – When the replacement property needs repairs/improvements, a Reverse Exchange with a Build to Suit component is a possible solution. Read more here.
- Timing – Most rules that apply to Delayed/Forward Exchanges also apply to Reverse Exchanges including 45 day identification and 180 day completion time frames.
- Experience – If all of this information seems daunting, don’t worry. The IPX1031® team has the experience and expertise to help navigate IRS Revenue Procedures, rules and regulations.
For more details, read How to Initiate a Reverse Exchange. As with all investments and wealth maintaining strategies, we advise you to seek the advice of your legal and tax advisors for your specific situation. IPX1031® has the largest and most experienced Reverse and Improvement Exchange division in the country specializing in transactions for REITS, life insurance companies, businesses and individual investors. Contact your IPX1031® to find out how this valuable tool can work for you.