Reverse 1031 Exchange: Another Tool in the Real Estate Professional's Toolbox

In a typical 1031 Exchange, property is sold and then replacement property is acquired. On occasion however, it may be advantageous to do the opposite; acquire property first and then sell. This can be accomplished with a Reverse 1031 Exchange. Although not as common as a “forward” 1031 Exchange, investors have been using the Reverse Exchange for years. Reasons for utilizing the Reverse 1031 Exchange generally fall into the following categories:

• Seize the Moment – You’ve stumbled upon the deal of a lifetime and you don’t want to miss out. You place an offer, which gets accepted, but you realize in order to make it all work, you’ll need to dispose of another property in your portfolio. No problem, purchase the new property and utilize the Reverse Exchange to later sell the property in your portfolio.

• Insurance Policy – Although not as common a reason for conducting a Reverse Exchange in today’s market, having an insurance policy in an exchange 7 years ago at the height of the real estate market was very helpful. In an over-heated market, many investors were fearful of being able to find quality replacement property within the specified 1031 Exchange timeframe (45 days to identify and 180 days to close). So instead of competing for replacement property on a strict timeframe many investors utilize the Reverse Exchange as an insurance policy to lock up their replacement property prior to selling.

• Change in Plans – The most common reason for conducting a Reverse Exchange seems to be a change in plans. Many investors find themselves in a situation where their property hasn’t sold as quickly as they thought it would, and they already made an offer on a replacement property. Instead of backing out of the purchase, the Reverse Exchange can be an effective tool for getting the transaction done tax-free.

Acquiring replacement property first in a Reverse 1031 Exchange does present a few difficulties however. First of all, funds will need to be available for the down payment on the acquisition property (keep in mind nothing has been sold yet).

Second, the properties involved in an exchange cannot be owned at the same time. In theory, an exchange is going from one property to another—so title to the new property and the old property can not be held at the same time. To properly structure a Reverse Exchange Asset Exchange Company will generally act as straw-buyer for the replacement property, which provides time for the client to sell the relinquished property.

Third, adherence to the 1031 Exchange timeframe is still required. What this means in a Reverse Exchange is that the property that will be sold to complete the exchange must be named by day 45 and it must close escrow on or before day 180.

FLORENCE MATTAR
Estate Specialist
Coldwell Banker
Previews International
301 N. Canon Drive, Suite E
Beverly Hills, CA 90210

Office: 310-777-6294
Mobile: 310-927-2777
Fax: 310-248-5387
www.BeverlyHillsPalaces.com
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