1031 Exchange transactions continue to be on the rise. What’s also trending is the need for Reverse Exchanges. With limited available inventory and the need to secure your ideal Replacement Property, you may find yourself in a situation where a Reverse Exchange is your best investment option.
What is a Reverse Exchange?
A Reverse Exchange allows a taxpayer to purchase new Replacement Property before selling their Relinquished Property while still being able to defer the taxes that would normally be due from the sale of the Relinquished Property.
Unlike a Delayed (Forward) Exchange, a Reverse Exchange is essentially a parking transaction. Since the Taxpayer cannot own both properties at the same time, one property is parked with an Exchange Accommodation Titleholder (EAT). In a typical Reverse Exchange, new Replacement Property is acquired by the EAT before the investor sells their Relinquished Property. While this structure is more complex than a Delayed Exchange, it can give you the advantage you need to maximize your investments.
Important Considerations for Reverse Exchanges and 1031 Exchanges
To ensure a successful 1031 Exchange or Reverse Exchange, here are some key components to keep in mind:
| 1031 Exchange | Reverse Exchange |
PLAN AHEAD |
| Look for Replacement Property early and do not hesitate to negotiate the purchase | √ | √ |
| A Reverse Exchange is more complex than a Delayed Exchange. If you need a Reverse Exchange, contact IPX1031 and your tax advisor as soon as possible to begin structuring it | √ |
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. IPX1031 must go on titIe to one of the properties (your purchase or sale) to avoid the problem of the taxpayer owning both properties at the same time | √ |
LENDERS |
| If the Exchanger is borrowing money to acquire the Replacement Property, the Ioan is actually made to the EAT, 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 contact the lender and start those discussions early in the transaction | √ |
COST |
| To ensure that an Exchange transaction makes sense, review the amount of depreciation recapture and capital gains tax being deferred with your tax advisor or attorney to ensure that the tax benefits justify the transaction costs | √ | √ |
| Reverse Exchanges are much more complicated than a Delayed Exchange, resulting in higher fees and costs | √ |
IMPROVEMENTS |
| When the Replacement Property needs repairs or requires improvements to increase the exchange value, a Reverse Exchange with a Build-to-Suit component is an excellent solution. | √ |
TIMING |
| 45 day identification and 180 day completion time frames | √ | √ |
| Most rules that apply to Delayed Exchanges also apply to Reverse Exchanges | √ |
IPX1031 – Your Reverse 1031 Solution
Regardless of the type of 1031 Exchange you need, our IPX1031 specialists are standing by to help make your transaction a smooth process. For more details, read Planning Ahead for a Successful Exchange and How to Initiate a Reverse Exchange. As with all investments and wealth maintaining strategies, you should seek the advice of your own legal and tax advisors for your specific situation. IPX1031 is the largest national qualified intermediary providing a full suite of services. IPX1031 also 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 IPX1031 to discuss your 1031 Exchange solution.
Read More
Reverse and Improvement Exchange Frequently Asked Questions
Reverse & Improvement brochure
Reverse book
Why are Reverse 1031 Exchanges More Complicated?
Capital Gains Estimator
IPX1031 Knowledge Center
