REVERSE 1031 EXCHANGES: A STRATEGIC INVESTMENT TOOL

As a national 1031 qualified intermediary, our team often fields the question: Can a 1031 exchange investor buy a replacement property before they sell (relinquish) property?

The short answer is yes, a taxpayer selling real estate can use the 1031 exchange process in reverse and still obtain tax benefits. Unlike a forward exchange, where sale proceeds are held in escrow, this arrangement involves “parking” the title to the replacement property with an exchange accommodator until the sale occurs. Parking arrangements come in a variety of shapes and sizes. They can be set up in several different ways; however, the focus of this article will be to help investors will be identify scenarios and opportunities where they can benefit from a reverse 1031 exchange.

Please keep in mind that a reverse exchange applies to the acquisition of a new property and does not apply to properties for which the investor seeking to transact an exchange has already acquired title. You can't exchange what you already own. It is not retroactive!

A reverse 1031 exchange enables an investor to purchase replacement real estate prior to relinquishing property (selling) and still obtain the tax benefits of a 1031 exchange. Although reverse exchanges are less common than a forward 1031 exchange where there is a sale followed by a purchase within 180-days of the sale; investors utilize reverse exchanges for a variety of reasons:

??????????????Business Relocation - Where a business is relocating from the relinquished property to the replacement property, utilizing a reverse exchange can help minimize business disruption. A reverse exchange allows the business to acquire its new space and transfer property/employees to that space before closing on the sale of their old space, effectively allowing access to both spaces at the same time. Using a variation called an improvement exchange, the business has the option to build their new space to suit and can count the cost of the improvements as part of their exchange. This is a huge benefit for a company selling their old facility or office at a gain.

???????????????Hot Market - In a “seller’s market” where properties remain on the market for a short period of time, the taxpayer can negotiate to buy a replacement property and park it with an accommodator. This eliminates the concern of meeting the IRS 1031 identification deadlines (45-day period).

???????????????Lock up the ideal replacement property - An investor locates a great replacement property; however, the relinquished property has not yet sold but will sell fast. The time to purchase cannot be extended to effect a forward 1031 exchange. The investor can take advantage of a valuable “buy opportunity” by closing the replacement property first and can utilize the full 180-day exchange period to complete the sale.

???????????????Unexpected delay - The sale falls through or is delayed, and the investor is already under contract to purchase the replacement property. If the investor is unable to extend the time to close on the replacement property, a reverse exchange can be a solution to prevent a default and still preserve the chance to benefit from a 1031 exchange.

Contribution by: James T. Walther, Esq., LL.M., Vice President and General Counsel, Legal 1031 Exchange Services, LLC & Legal 1031 EAT Holdings, LLC.

Legal 1031 is a national qualified intermediary experienced in facilitating 1031 exchanges of all levels of complexity. Visit Legal1031.com for more information.

To discuss your potential options please e-mail

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DISCLAIMER: This article is intended to be for general information purposes, the information provided herein may not be applicable or relevant in all scenarios and should not be acted upon without specific tax or legal advice from an experienced advisor.

Legal 1031 Exchange Services, LLC does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of your exchange transaction. Property owners must consult their tax and/or legal advisors for this information. Our role is limited to serving as qualified intermediary to facilitate your exchange.

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