Reverse 1031 Tax Deferred Exchange
The most common scenario is when an investor sells one investment property and then purchases another like kind investment property while being able to defer paying taxes.
On occasion an investor may need to purchase their replacement property prior to the sale of their existing property to avoid the risk of losing the property.
If the investor owns both the relinquished property and the new property at the same time the IRS will not consider the transaction to be an exchange of real estate.
In 2000 the IRS created the mechanism for a "reverse" 1031 tax deferred exchange to resolve this dilemma.
In a reverse 1031 tax deferred exchange either the new property or the relinquished property must be held, temporarily, by a qualified intermediary.
The IRS allows for a safe harbor providing the following conditions are met:
It is imperative that the investor arranges the 1031 reverse exchange with the EAT prior to the replacement property closing or the IRS will disallow the tax deferred exchange.
If for some reason the investor is unable to sell the relinquished property within the strict 180 day deadline, the EAT will transfer title of the new property to the investor.
The investor will end up owning both the replacement property and the relinquished property which was not sold.
A failed reverse exchange will not result in a taxable event for the investor.
The reverse 1031 exchange becomes the best answer when an investor has found, and is ready to close on the new property.
This all happens while the investor is still trying to sell the old, original property.
Another reason to setup a reverse 1031 exchange includes securing your new property to avoid the risk of possibly losing that property.
Also this rids yourself of the replacement property "dilemma" once you have sold that old (original) property, because there is a short 45 day window to find a suitable replacement investment property.
What ever your reason for deciding to purchase your new property first, the reverse 1031 exchange allows you to acquire your like-kind replacement investment property first and then subsequently sell your relinquished property within the prescribed 1031 exchange deadlines.
It can be a great strategic tool when needed or preferred.
On occasion an investor may need to purchase their replacement property prior to the sale of their existing property to avoid the risk of losing the property.
If the investor owns both the relinquished property and the new property at the same time the IRS will not consider the transaction to be an exchange of real estate.
In 2000 the IRS created the mechanism for a "reverse" 1031 tax deferred exchange to resolve this dilemma.
In a reverse 1031 tax deferred exchange either the new property or the relinquished property must be held, temporarily, by a qualified intermediary.
The IRS allows for a safe harbor providing the following conditions are met:
- The qualified intermediary will arrange for an Exchange Accommodation Titleholder (EAT) to take title to the replacement property based on a written contract from the investor.
The investor provides the funds for the purchase of the replacement property. - Investor has 45 days from the date of the closing on the replacement property to identify the property or properties to be sold.
- Investor has 180 days from the date of the closing on the replacement property to close on the sale of the relinquished property.
- The qualified intermediary transfers title of the replacement property to the investor.
It is imperative that the investor arranges the 1031 reverse exchange with the EAT prior to the replacement property closing or the IRS will disallow the tax deferred exchange.
If for some reason the investor is unable to sell the relinquished property within the strict 180 day deadline, the EAT will transfer title of the new property to the investor.
The investor will end up owning both the replacement property and the relinquished property which was not sold.
A failed reverse exchange will not result in a taxable event for the investor.
The reverse 1031 exchange becomes the best answer when an investor has found, and is ready to close on the new property.
This all happens while the investor is still trying to sell the old, original property.
Another reason to setup a reverse 1031 exchange includes securing your new property to avoid the risk of possibly losing that property.
Also this rids yourself of the replacement property "dilemma" once you have sold that old (original) property, because there is a short 45 day window to find a suitable replacement investment property.
What ever your reason for deciding to purchase your new property first, the reverse 1031 exchange allows you to acquire your like-kind replacement investment property first and then subsequently sell your relinquished property within the prescribed 1031 exchange deadlines.
It can be a great strategic tool when needed or preferred.