Reverse 1031 Exchange

In a reverse 1031, a new property is purchased before an existing property is sold.  This type of exchange is less common and subject to different regulations.  Though not mandatory, “Safe Harbor” regulations were instituted by IRS Revenue Procedure 2000-37.  These regulations function similarly to delayed exchange regulations.  Reverse exchanges that do not adhere to “safe” harbor regulations are at a greater risk of audit by the IRS.

1. Replacement property is identified prior to relinquished property being sold
2. The replacement property is purchased and title transferred to the Exchange Accommodation Titleholder (EAT), who is usually the qualified intermediary.  This must be done within 5 days to meet the 5 day rule.
3. The Qualified Exchange Accommodation Agreement is executed within 5 days of title transfer to teh EAT
4. The exchanger (investor) has 45 days from closing on the replacement property to identify the relinquished property
5. The exchanger has 180 days to sell the relinquished property
6. The EAT transfers title back to the exchanger once the relinquished property is sold and the exchange is completed.

In some cases a reverse exchange can be combined with a 121 (primary residence exclusion) to convert an income property into a primary residence.  The property must be held at least 5 years (pursuant to 121 regulations), serve as an income property for at least 12-18 months after the 1031 exchange, and have been lived in for at least 24 months of the 5 year period.

Please contact a qualified intermediary prior to the purchase of a replacement property in a reverse 1031 exchange.

You must make sure you can handle an extra mortgage.  These are typically recommended for higher net-worth investors.