1031 Reverse Exchange: When, Where, What, Why & How
To Complete A Reverse 1031 Exchange

As the months progress, investors and CPA’s are becoming more knowledgeable on the countless benefits of a Reverse 1031 Exchange. Although it is not a simple transaction and a tad bit more complicated than a traditional 1031 Tax Exchange , the reverse exchange is much more versatile than a 1031 exchange.

There could be multiple motives for structuring reverse exchanges, but the principal cause is to figure out the necessary issue of finding a method to take title of the 1031 replacement property preceding the sale of the first investment property involved in the 1031 deferred exchange. The Internal Revenue Service does not sanction for the 1031 exchanger to trade into an investment property previously held. The reverse 1031 exchange can solve this dilemma if an investor has identified another replacement property and can close on it. This part of the transaction is occurring before you have sold your property. Additionally, if an investor has located an ideal property to purchase, a reverse 1031 exchange will eliminate the risk of the investor possibly losing that property if he was to first wait and attempt to sell his current property. Also, reverse exchanges will solve the 45 day identification rule, which often time is to fast, and might result in an investor purchasing a replacement property that isn’t number one on the list.

Once an investor is certain that a reverse 1031 exchange is the solution for their 1031 trade requirement it is now necessary to discuss the various types of reverse 1031 exchanges that are available. There are multiple options available in reverse 1031 exchanges. Below you will find four types, the 1^st three being much more popular.

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In a Safe-harbor reverse 1031 exchange the Qualified Intermediary (QI) obtains complete power, known as “parking” the replacement property preceding to the selling of the relinquished property. Within 45 days of this parking arrangement, the 1031 exchanger must identify the property he or she is planning on selling. Additionally, the whole proceeding must be consummated within 180 days of the parking arrangement. This type of exchange is laid out in the Internal Revenue Service tax code in year 2000. Provided that the transaction is properly structured, the IRS will handle this to be within a “safe-harbor” and won’t test the deal based upon its standing as a reverse 1031 exchange. Out of the 4 types of reverse 1031 exchange choices, this is the safest. The disadvantage of type of 1031 reverse exchange is that it gives the least amount of time to consummate the exchange due to the short 45 day time frame.

2. Traditional Reverse 1031 Exchange

A traditional reverse 1031 exchange is almost the same as a Safe Harbor reverse exchange. However, it doesn’t qualify as the “safe harbor” because the transaction can’t be completed within the 180 days as mentioned in the Safe-Harbor 1031 reverse exchange. This occurs should the exchanger not be able to sell his original property in less than 180 days of the parking arrangement with the Qualified Intermediary. The time limit put forth by the Safe Harbor will not be met on time. Now don’t get too nervous, as this type of reverse 1031 exchange does not customarily raise any alerts to the IRS to knock on your door for an audit. However, it does force you to have better documentation. If you are considering this form of a reverse 1031 exchange, be sure to select an excellent Qualified Intermediary and tax attorney to ensure you are obeying the rules

3. Improvement/Construction 1031 Reverse Exchange

An improvement or construction reverse 1031 exchange permits the 1031 exchanger to “park” a parcel of land that will be constructed upon or a building which will be improved upon within the 1031 exchange time frame. This type is the most powerful reverse 1031 exchange as it enables the 1031 exchanger to produce the 1031 exchange replacement property. This new property that will be improved or built upon will be the end product they will ultimately exchange into. As said previously, this type of 1031 reverse exchange is more complex than a Safe Harbor exchange and more paperwork as well as costs from your QI and tax attorney. Although this type of 1031 reverse exchange most likely will not fall within the guidelines of a Safe Harbor exchange, it hasn’t worried too many exchangers as countless developers are happily willing to take a small risk in return for the enormous versatility granted by this sort of 1031 reverse exchange.

4.

The Leasehold Improvement reverse 1031 exchange has not yet been acknowledged by the IRS as a legal 1031 structure. This 1031 reverse exchange is where the 1031 exchanger will erect a building on real estate which they already own title, thus treating the structure as the “parked” replacement property. In actuality it’s not the edifice that turns out to be the parked property, but rather a long term ground lease entered into among the QI and the 1031 exchanger is the true vehicle that turns out to be the exchanged replacement property. Most QI’s advise against this type of reverse 1031 exchange, due to its intricacy and doubtful permissibility resulting with most investors avoiding this option…

Hopefully, you now have a better understanding of some broader options using reverse exchanges to your advantage. Westwood Net Lease Advisors is not a QI but we can refer you to very reliable National companies with a long standing reputation. Our expertise is providing and educating the exchanger with ideal property that meets the requirements of these various exchanges.

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1 Response to “Reverse Exchange | Important facts about a 1031 Reverse Exchange”

Homepage New | Westwood January 23rd, 2009 at 12:13 pm

[...] Reverse 1031 Exchanges are very powerful. View the various types of 1031 Reverse Exchanges and the risks and benefits associated with each selection. [...]

1031 Reverse Exchange: When, Where, What, Why & How To Complete A Reverse 1031 Exchange

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2. Traditional Reverse 1031 Exchange

3. Improvement/Construction 1031 Reverse Exchange

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1 Response to “Reverse Exchange | Important facts about a 1031 Reverse Exchange”

1031 Reverse Exchange: When, Where, What, Why & How
To Complete A Reverse 1031 Exchange

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Start the thread! We'll respond promptly!