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A Reverse 1031 Exchange
What is a Reverse 1031 Exchange, how can it benefit an investor, and what are the risks involved?
In a nut shell a Reverse 1031 Exchange allows the investor to purchase a replacement property before selling the property to be relinquished. It can also be used when the investor wants to acquire a property and construct improvements on it before taking title.
The advantage to structuring an exchange this way is that the investor has more than the traditional 45 days to identify their replacement property. The main disadvantage is that the investor cannot depend on the cash coming from the sale of its relinquished property to purchase the replacement property.
The rules governing Reverse Exchanges can be summarized as follows:
The 5 Day Rule A Qualified Exchange Accommodation Agreement must be entered into between the taxpayer and the exchange accommodator titleholder (QI or Qualified Intermediary in most cases) within five business days after title to the property is transferred to the exchange accommodation titleholder.
The 45 Day Rule The property to be relinquished (sold) must be identified within 45 days. More than one property can be identified using similar rules to those used when doing a Delayed Exchanges (3 Property Rule, 200% Rule and the 95% Rule).
The 180 Day Rule The Reverse Exchange must be completed within 180 days of taking title by the exchange accommodation titleholder.
The key to successfully completing either a Reverse or Delayed Exchange is good planning, having a clear set of investment objectives and having the right players on the investor’s team.
Some of the members of the investor’s team should be their Real Estate Investment Strategic Advisor, a CPA, a Real Estate Attorney, a Qualified Intermediary (QI) and, a provider of 1031 replacement property.
We suggest that the investor consult with each member of their team as they step through their 1031 Exchange.
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