Question
ARTE's Answer
Yes, you can do a reverse 1031 exchange, and it’s a great strategy for those who want to acquire a replacement property before selling their relinquished property. At Deferred.com, we offer qualified intermediary services to facilitate such exchanges, ensuring compliance with IRS guidelines and helping you defer capital gains taxes.
A reverse 1031 exchange is essentially the opposite of a traditional 1031 exchange. In a traditional exchange, you sell your relinquished property first and then acquire a replacement property. In a reverse exchange, you acquire the replacement property first and then sell the relinquished property. This can be particularly useful if you find a desirable replacement property and want to secure it before selling your current property.
To execute a reverse 1031 exchange, you must follow specific guidelines outlined in Revenue Procedure 2000-37. This procedure provides a safe harbor for reverse exchanges, allowing you to defer capital gains taxes if you meet certain requirements. One key requirement is that the exchange must be completed within 180 days.
Here’s how a reverse 1031 exchange typically works:
- Engage a Qualified Intermediary (QI): At Deferred.com, we act as your QI, facilitating the exchange process. We ensure that you do not have constructive receipt of the funds, which is crucial for maintaining the tax-deferred status of the exchange.
- Parking Arrangement: In a reverse exchange, you cannot own both the relinquished and replacement properties simultaneously. Instead, an Exchange Accommodation Titleholder (EAT) is used to “park” one of the properties. The EAT holds the title to either the replacement or relinquished property during the exchange period.
- Acquisition of Replacement Property: You identify and acquire the replacement property first. The EAT, funded by a loan from you, takes title to the replacement property. This allows you to secure the property without having to sell your relinquished property first.
- Sale of Relinquished Property: Within 180 days, you must sell your relinquished property. Once the sale is complete, the EAT transfers the replacement property to you, completing the exchange.
Let’s look at an example to illustrate this process:
Imagine you own a commercial property worth $500,000 that you plan to relinquish. You find a new commercial property valued at $600,000 that you want to acquire immediately. You engage us at Deferred.com as your QI to facilitate the reverse exchange.
- Step 1: We set up an EAT to take title to the new $600,000 property. You loan the funds to the EAT to purchase the property.
- Step 2: The EAT holds the title to the new property while you work on selling your existing $500,000 property.
- Step 3: Within 180 days, you sell your existing property for $500,000. The proceeds from this sale are used to complete the exchange.
- Step 4: The EAT transfers the title of the new $600,000 property to you, finalizing the reverse 1031 exchange.
By using a reverse 1031 exchange, you can secure the new property without the pressure of selling your existing property first. This strategy allows you to defer capital gains taxes, provided all IRS requirements are met. At Deferred.com, we ensure that the process is seamless and compliant, saving you money with our “No Fee Exchange” service.
Have more questions? Call us at 866-442-1031 or send an email to support@deferred.com to talk with an exchange officer at Deferred.
Sources
- TAM 200039005 (Failed Reverse Exchanges)
- DeCleene v. Comm., 115 TC 457
- IRS Info Letter 2007-0009 (Reverse Exchanges Do Not Qualify for Postponement)
- Goolsby v. Commissioner
- DeCleene v. Comm., 115 TC 457
- Rev. Rul. 2002-83 (Related Party Exchanges)
- Reverse Exchange (Article)
- Deferring Losses On The Sale of Property Using 1031 Exchanges
- TC Memo 2014-110
- What To Do About Exchange Expenses in a Section 1031 Exchange? (Article)
- Starker v. United States
- Rev. Rul. 2002-83 (Related Party Exchanges)
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