Reverse 1031 Exchange Services
Reverse 1031 exchanges allow you as an investor to acquire a new property now, when a fantastic opportunity may be available, and sell another property later, when you might get a better sale price, without paying capital gains tax. These exchanges are complex and require real expertise into the risks involved, as well as clear guidance on the process and its legality. Read on to learn everything you want to know about reverse 1031 exchanges and to see if they are right for you.
What is a Reverse 1031 Exchange?
A reverse 1031 exchange is advantageous when you have found the replacement property you want to buy before you have closed on the sale of your relinquished property.
You can still defer capital gains taxes on the sale of your relinquished property, so long as you follow IRS regulations.
Reverse vs Traditional 1031 Exchanges (Side by Side Comparison)
Traditional 1031 Exchange
Reverse 1031
Exchange
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Sell your relinquished property first
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Park the relinquished property
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Buy a replacement property later
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Buy a replacement property first
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Park the replacement property
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Sell your relinquished property later
Process Overview for a Reverse 1031 Exchange
Engaging a Exchange Accommodation Titleholder (EAT)
A qualified intermediary will serve as an Exchange Accommodation Titleholder (EAT), acquiring and holding the replacement property and parking it in a unique special purpose entity, typically a single member LLC. To fulfill the requirements of the reverse exchange, the EAT will take title to either the relinquished property or the replacement property under a “Qualified Exchange Accommodation Arrangement” (QEAA).
Detailed Timeline from Identifying to Closing on Properties
Once the EAT has started the exchange by acquiring and parking the new replacement property, you must identify one or more relinquished properties to be exchanged for it within 45 days. The identified relinquished property must then be sold, and the parked new property transferred to you, within 180 days.
What Is the ‘Safe Harbor’ Parking Arrangement?
The IRS has provided guidelines to facilitate exchanges, called the “safe harbor” parking arrangement. These state that an agreement must be entered into between you and an EAT within 5 days of the EAT taking title of the property that is to be parked. With a reverse exchange, identification of the relinquished property must happen within 45 days after the EAT acquires the title for the parked new property. And as with all exchanges, the combined time frame that the relinquished and replacement properties are held in a parking arrangement cannot extend beyond 180 days.
Financial Planning for Reverse Exchanges
At 1031 Pros, we are committed to helping you plan for your exchange, so you make the most of your investment. Reverse 1031 exchanges are more complicated than traditional exchanges, and can be more time consuming and costly.
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In reverse 1031 exchanges, you need to ensure that you have sufficient funds to purchase the replacement property, before you receive money from the sale of your relinquished property. This can include expenses such as transaction fees, legal fees, and the cost of financing. Financing the purchase of your new property can be a challenge, as some lenders are hesitant to provide loans without immediate sale proceeds as assurance.
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We are here to help guide you through the process, from start to finish.
Risks of Reverse Exchanges and How to Mitigate Them
A Tight Timeline
Your relinquished property must be identified within 45 days of acquiring your replacement property, and the entire transaction completed within 180 days.
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Tax Liability
If the relinquished property fails to sell within the 180-day timeline, you may be required to pay capital gains taxes.
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Legal and Administrative Requirements
In some cases, there are additional requirements to fulfill to complete your reverse 1031 exchange. Our experts will help you ensure that the process runs smoothly and successfully.
Real Estate Market Insights for Reverse Exchanges
Before acquiring a replacement property, you should undertake thorough research on it, including the location, market conditions, potential income from renting, and any outstanding liabilities or legal issues. In some locations, reverse 1031 exchanges are impacting the real estate market, as investors use them to strengthen their real estate portfolios,
which can have an impact on supply and demand and trends in pricing. We will help you stay informed about trends and regulatory considerations so you thoroughly understand the potential impact of reverse exchanges on your investment portfolio.
Legal and Tax Implications
As with all real estate transactions, reverse 1031 exchanges must conform to IRS guidelines and laws at the state and local level; they must also be compliant with the rules specific to 1031 exchanges.
At 1031 Pros, we are expert professionals who specialize in real estate and tax considerations, so we can help you mitigate risks and navigate this often complex process.
Choosing a Qualified Intermediary for Reverse 1031 Exchanges
Not All Qualified Intermediaries Handle Reverse Exchanges
Because reverse 1031 exchanges are more complex than traditional exchanges, not all qualified intermediaries handle them. At 1031 Pros, we are fully prepared to help with all forms of 1031 exchanges, including reverse exchanges. With us, you will get:
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Service in all 50 states from experienced 1031 exchange experts
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All of the appropriate documents for the escrow or title company, to be signed at the closing of your relinquished property
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A unique, FDIC-insured individual account used for each transaction
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Coordination with your title company and transfer of funds on the close of your replacement property
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Release of exchange funds to a legitimate real estate closing, with the exchanger’s signed release.
Assistance After Your Reverse Exchange
As expert 1031 advisors, we offer full and complete service for your exchange, including ongoing compliance checks, tax advice, access to a network of property management and real estate experts, and much more. We will even work with you to create a long-term real estate investment strategy, to be sure that you are maximizing your investments and building a strong portfolio. Got questions? We’re ready.
Top Tier Customer Service
Our customer service is unmatched in the industry, including a live person answering the phone when you call at any time, 24/7, and responses to emailed questions within 24 hours.
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Contact us at 916-252-6900 for a free consultation before closing on your new replacement property, to ensure that you are set up for success.
Contact Us Today
Whether you're ready to sell today or in the future, we are happy to answer any questions you may have about your real estate portfolio.
Reach out to learn how we can help save you money and grow your portfolio.