Reverse Exchanges: Buy Now, Sell Later
When performing standard 1031 exchange transactions, investment property is sold first — after which the seller purchases a new piece of real estate. A reverse exchange allows the acquisition of new property before the selling of the existing investment.
IRS Revenue Procedure 2000-37: This law sanctioned the reverse exchange “safe harbor” rule, providing a parking arrangement for investments. If a seller cannot sell the existing property within the timeframe to perform a standard 1031 exchange, a qualified intermediary (QI) can hold title on the desired property until the first property sells. The seller is then able to take possession of the new investment parcel from the QI.
Reverse Exchange Rules
- Reverse exchanges must be completed in 180 days. The 180-day countdown starts on the date the QI purchases the replacement property for the taxpayer/seller.
- Within 45 days after the purchase of parked property, a form must be completed that identifies the relinquished property to be sold.
- A Qualified Exchange Accommodation Agreement form must be completed by the QI and the taxpayer.
- Upon the sale of the investment property, one can defer all capital gains tax by purchasing replacement property.
When a Reverse Exchange is Useful
- The owner of investment property listed for sale finds the ideal replacement property before finding a buyer for the exchange property.
- The real estate investor needs to purchase prime real estate as it enters the market.
- Real estate sellers wish to avoid identifying replacement property in the 45 days required by a 1031 exchange. Therefore, they purchase model replacement property first.
As soon as you realize that you may qualify for a reverse exchange, you should contact a qualified intermediary to discuss your situation. While these exchanges can be completed efficiently, the sooner you understand the necessary steps, the more likely you are to qualify.
Midland 1031 has helped hundreds of people complete reverse exchanges. They can be technically difficult but are a wonderful tool for avoiding paying taxes and maximizing wealth.
Ready to learn more? Contact us today! 239-333-1031