Reverse 1031 Exchange Properties

Reverse 1031 Exchange

One of the most feasible methods for taxpayers to defer their tax payment on property sale is to keep reinvesting the proceeds in like-kind or similar property. Notably, delayed 1031 exchange is a widely chosen method in this regard owing to the 180-day relaxation it offers between the sale of relinquished and the buying of replacement property. Besides it, the reverse exchange of property is also a preferred method due to better flexibility it ensures in the structuring of 1031 property exchange. However, compared to other ways, the 1031 reverse exchange rules are a bit more complex and require a higher volume of paperwork and documentation formalities. Let’s know some more about it.

What is reverse 1031 exchange?

A reverse exchange involves the purchase of replacement property, before selling the relinquished property. It is hence the transaction of properties in reverse order than usual, where the intermediary holds the title to the replacement property till the time the taxpayer finds a buyer for his relinquished property. The buyer then closes the deal with the intermediary under an exchange agreement. There can be many reasons to opt for

Reasons for doing a reverse 1031 exchange

Some of the most prominent factors to choose reverse 1031 exchange properties ahead of other ways include:

Urgency: An urgent and lucrative investment opportunity that need you to act promptly, leaving no time for you to think about selling or listing the relinquished property

Fear of losing the property: To avoid parting ways with your acquisition, which is closing soon in the wake of an unexpected collapse of your relinquished property’s disposition
Freedom from identifying replacement property: To ease out the pressure of identifying the like-minded replacement property within the 45 days of identification period in a regular 1031 exchange
Whatever be the reason for selecting the reverse exchange property method, the decision could well turn out to be beneficial provided that you choose the right type of exchange.

Types of 1031 reverse exchange

Abiding by the reverse 1031 exchange definition, there are various options available in the reverse 1031 exchange of properties. The most popular ones include:

Safe-harbor reverse exchange: In this transaction, the qualified 1031 exchange firms take hold of the replacement property before the sale of relinquished property. This arrangement for property transaction is termed as “parking”.

Traditional 1031 reverse exchange: This method falls outside the safe harbor as it may take more time than required to complete the exchange. Though it is not a Red Flax for IRS audit, but still, it needs immense consultation and documentation work by qualified intermediary (QI), or the reverse 1031 exchange companies.
Both these reverse exchanges of common and take place when the taxpayers arrange for an Exchange Accommodation Titleholder (EAT), which are usually one of the reverse 1031 exchange firms . These companies hold the title on temporary basis, before the taxpayer finds a buyer for relinquished property. Sometimes, the intermediary exchange firms take and hold the relinquished property title until the buyer is found.

As an added requirement for the 1031 exchange reverse timing, Rev. Proc. 2004-51 issued in 2004, the reverse starker exchange needs to be under the safe harbor “umbrella”. As a matter of fact, any property, which the taxpayer has owned in the past 80 days, is considered ineligible for protection under safe harbor procedures, Rev. Proc 2000-37.

In any case, taxpayers benefit significantly, especially in situations where they require the closing of purchase of replacement property prior to the sale of relinquished property. Following the IRS reverse exchange rules is also profitable in circumstances where the taxpayers want plenty of time to look out for appropriate replacement property, before disposing off a relinquished property, which commemorates the respective cocks of 45-day and 180-day for delayed exchanges, respectively.

Time Clocks

The taxpayers need to comply with the requirements of safe-harbor procedures, which seek proper analysis for planning and impact. These can be summarized under different 1031 reverse exchange rules, such as:

5-Day rule: The taxpayer and the titleholder of the exchange accommodation, which is mostly a qualified intermediary, must sign a “qualified exchange accommodation agreement”. This agreement should take place within five days after the titleholder takes the title to property, while expecting a reverse exchange
45-Day rule: the relinquished property must be identified within the identification period of 45 days. On the similar lines as followed in the case of starker or delayed exchange, it is possible to identify multiple potential properties to be sold
180-Day rule: right from the time the exchange titleholder takes the title to property, the entire 1031 reverse exchange procedure must be accomplished within the next 180 days.

Summary: Abiding by 1031 reverse exchange rules is a feasible option to avoid or delay paying taxes on a sold property for an extended time. While delayed exchange is a widely preferred method in this regard, taking a dig into reverse 1031 exchange definition could also be equally profitable.

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.