Reverse 1031 Exchange Rules:
Relinquished Property  (Exchange First)

 


When would I need a reverse exchange? 
When you need to close on your purchase property (replacement) before you can close on your sale property (relinquished).


Are reverse exchanges legal?
Yes, the IRS knows about and allows reverse 1031 exchanges. They are more challenging to execute, though. 

In 2000 in Rev, Proc. 2000-36, the IRS set forth the procedures to safely perform a reverse 1031 exchange. The rules state that you can't simply buy your replacement property first and then sell your relinquished property second. This is because you can't hold title to both properties at the same time. Either the replacement property or the relinquished property must be held, temporarily, by a holding company known as an Exchange Accommodation Titleholder (EAT).

We will create the holding company as a new limited liability company (LLC) When our LLC holds the relinquished property, this is also known as “exchange first“ reverse exchanges. (Click here to read about an "exchange later" replacement reverse transaction.)

Some "holding company" buys my relinquished property? Is that safe?
We will set up a new single-purpose LLC for your exchange transaction. This LLC's only legitimate functions are to hold your relinquished property in a reverse exchange and then, under your direction, sell the property to a third-party buyer.

You negotiate the terms of the sale, then assign the contract to the EAT. These terms and responsibilities are set forth in a real estate holding contract, signed by both parties.  


Our LLC will also lease the relinquished property to the exchanger until the relinquished property sells, or for 180 days, whichever occurs first.


How can the EAT afford to purchase my relinquished property?

Our LLC will purchase the relinquished property by borrowing 100 percent of the needed funds. We can borrow the funds from any source that you authorize. 

The easiest source of borrowed funds is you. We plan to resell the relinquished property very quickly, so we often leave any existing financing in place on the relinquished property and take title to the property subject to the existing financing. (Lease payments owed by you to our LLC will correspond in amount to mortgage payments made by our LLC to you.)

Any lender is protected by a note and deed of trust on the relinquished property. Finding a lender for a reverse exchanger can be difficult! 
Please contact us is you need help finding a reverse exchange lender.


Do reverse 1031 exchanges have rules similar to forward exchanges? 
In a way, yes. This is particularly true of "exchange first" reverse transactions. 

For example, you are allowed to identify up to three potential replacement properties within 45 calendar days of the EAT's purchase of your relinquished property. To stay within the "safe harbor," you must complete your entire reverse 1031 transaction within 180 calendar days of the EAT's purchase of your relinquished property.  

At the time of sale of the exchanger’s relinquished property, 1031x.com, Inc. will act as Qualified Intermediary for the exchanger and escrow the funds from the sale of the relinquished property. Net proceeds from the sale of the relinquished property will be used to buy replacement property. THE NET EFFECT OF THIS WILL BE SIMPLY TO SHIFT ALL EQUITY FROM THE RELINQUISHED PROPERTY TO THE REPLACEMENT PROPERTY. In the end this looks very much like a forward exchange with us having captured and held the relinquished property until a third party buyer can be found. 



What happens if I cannot complete the reverse 1031?
When a reverse exchange fails, our real estate holding agreement states that we will transfer whatever property we are holding to you at the end of 180 days. You end up owning both relinquished property and replacement property. A failed reverse exchange is not a tax-recognition transaction. You will simply own more real estate than you had hoped.

 

 


Contact us for help with your reverse exchange.

 

Defer your taxes with a 1031 exchange

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