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Reverse 1031 Exchange FAQ




Q1: What is a reverse 1031 exchange? 

Ans: Under IRC code section 1031 (IRS) of the United States, a Reverse Exchange of properties is a kind of property exchange that may defer the capital taxes and gains due upon the sale of a personal property by purchasing the replacement property before the relinquished property is sold.  


Q2:   How is the reverse exchange done? 

Ans:  It is done by having a limited liability company (LLC), owned by an Exchange Accommodation Titleholder (EAT), which is usually any of the   reverse 1031 exchange companies, also known as Qualified Intermediary (QI).     


Q3:   What is the role of QI in a reverse exchange of property? 

Ans:  The QI creates the LLC to acquire the replacement property and temporarily holds title to it. Until the taxpayer  finds a buyer for his exchange property and signs an exchange agreement with the QI regarding close on the sale, the QI continues to hold the exchange title. 


Q4:  What could be the probable reasons behind IRS reverse exchange? 

Ans:  Some prominent reasons for a taxpayer to follow 1031 reverse exchange rules may include  

·          An urgent investment opportunity 

·          Apprehension of losing the replacement property 

·          To be free from identifying replacement property within 45 days 


Q5:   What are different types of reverse exchanges? 

Ans:   There are two types of reverse exchanges – Safe Harbor reverse exchange and Traditional 1031 reverse exchange. 


Q6:   What is Safe-Harbor reverse exchange? 

Ans:  Doing a reverse 1031 exchange under the safe harbor rules of Revenue Procedure 2000-37 requires the taxpayer to complete all the transaction formalities within 180 days of the first closing. This particular property arrangement is called as “Parking”. 


Q7: What is a traditional 1031 reverse exchange? 

Ans: A traditional form of reverse exchange usually falls outside the safe harbor. It takes comparably more time to complete the exchange formalities, as it needs repeated consultations and immense paper work by reverse 1031 exchange firms or the QI. 


Q8: Why “Parking” is an important condition in the reverse exchange of properties? 

Ans: The Revenue Procedure 2000-37 prohibits the taxpayer (the exchanger) from owning both the relinquished and replacement property at the same time. This is where the importance of Parking comes into effect, and is helpful in improving the replacement property. 


Q9: How Parking helps the taxpayer to abide by the reverse 1031 exchange definition?   

Ans: During a property exchange, parking allows the   Exchange Accommodation Titleholder to take and hold the title to the property. 


Q10:  What are the different approaches for Parking to complete the transaction under the reverse exchange rules? 

Ans:  Reverse exchange can be completed by any of the following two approaches:  

·          Park Replacement Property (Exchange last)   

·          Park Relinquished Property (Exchange first) 


Q11:   What are the factors that determine whether the replacement or relinquished property needs to be parked? 

Ans:   Different factors are taken into account for this purpose, such as: 

·          Funding source to pay for the acquisition 

·          Equity involved with the relinquished property 

·          Liens associated with the relinquished property 


Q12:  What is a Park Replacement Property or Exchange Last reverse exchange approach? 

Ans:  This method requires the EAT to take title to the replacement property at the scheduled closing. The EAT acts as the borrower of the loan on behalf of the taxpayer or investor, if the latter is borrowing money to buy replacement property. Additionally, the EAT borrows equity from the investor. Both the investor and the EAT enter into a lease and sign a “Qualified Exchange Accommodation Agreement”. 


Q13:   How is the “Qualified Exchange Accommodation Agreement” beneficial for the taxpayer (or investor)? 


Ans:   The agreement, together with the lease, gives complete control of the property to the investor. While it makes the investor responsible to pay all the property expenses, it also allows the investor to get all the income gained from the property. In all this, the EAT remains only the titleholder to the replacement property, and does not act as the owner of the same. 


Q14:   What is Park Relinquished Property or Exchange First reverse exchange approach? 

Ans: This method requires the EAT to take title to the relinquished property. It should take place before the closing of the replacement property. The EAT acts as a buyer of the relinquished mainly due to unavailability of the investor to find a buyer or due to some other unknown reason. The EAT borrows the equity from the investor to pay the purchase price for relinquished property. 


Q15:   What happens if the taxpayer fails to find a buyer in the allowed 180 days of 1031 exchange reverse timing? 

Ans:  If the investor is unable to find a buyer to the relinquished property within the parking period of 180 days, the EAT transfers the held property back to the investor. This ultimately closes the opportunity for the taxpayer to trade into the replacement property. The money paid to perform of the reverse 1031 exchange also remains non-refundable. 


Q16:  How can the taxpayer buy more replacement property if he fails in the reverse exchange in the first attempt? 

Ans:   In such as case, the investor can opt for a deferred or delayed 1031 exchange with the relinquished property once it is about to close. 




At Triple Net Investment Group we can assist you in locating a like-kind property for a 1031 exchange and ensure a smooth and successful transaction.

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