An exchange under section 1031 of the Internal Revenue Code can provide several potential benefits. You can expand your real estate portfolio and diversify it geographically through a well-planned exchange while deferring capital gains tax.
Tax-deferred exchanges involve first selling one property, then buying another. In today’s real estate markets, many investors are taking advantage of the opportunities offered by reverse 1031 exchanges.
Here is a reverse 1031 exchange you can see here. An explanation of how reverse 1031 exchanges work and how they can help you grab good deals and grow your real estate business.
What Is A Reverse 1031 Exchange?
In contrast to the delayed exchange, the reverse 1031 exchange occurs. Contrary to the Delayed Exchange, which requires the Exchangor to relinquish property before acquiring property, the Reverse Exchange allows the Exchangor to accept property and relinquish it afterward. A Reverse Exchange enables an investor to purchase a new property when a good opportunity arises and sell the old one later at a better price.
Revenue Procedure 2000-37 is the primary framework for the Reverse 1031 Exchange. Many investors now follow the Revenue Procedure to get the safety net benefits of reverse exchanges, although reverse exchanges have existed for decades before the Revenue Procedure.
Why Do A Reverse 1031 Exchange?
There are investment opportunities in many real estate markets today that were almost impossible to find less than a year ago. In a reverse 1031 exchange, you can take advantage of potential investment opportunities before someone else does:
- Reverse 1031s are a great way to secure the right replacement property at the right price and time in a constantly changing real estate market.
- You have more time to choose and negotiate the best deal for your investment strategy by purchasing the replacement property first.
- List the relinquished property for sale after closing on the replacement property. You will have greater control over the price and contract terms to ensure that the reverse 1031 exchange is completed successfully within the 180-day timeline.
How To Conduct A Reverse 1031 Exchange?
When performing a reverse 1031 tax-deferred exchange, there are eight steps to follow:
- Fund the purchase of the replacement property with cash, conventional financing, or short-term private financing.
- You will need a written agreement with the Exchange Accommodation Titleholder (EAT) to take possession of and hold title to your replacement property.
- Close the sale of your replacement property and take actual possession of the property from the EAT.
- Within 45 days of closing, you must identify the relinquished property.
- You or the LLC you are holding the property under should be the seller of the relinquished property, not you. The buyer of the repossessed property should sign a written sales contract.
- A QI will be assigned the right to transfer the title of the relinquished property to the buyer. The buyer will also have the right to obtain the title of the replacement property from the EAT.
- Following the purchase of the replacement property, you must complete the following three items:
- Deed the repossessed property to the buyer
- QI must receive the sale proceeds directly from the relinquished property.
- QI uses the sales proceeds from the relinquished property to purchase the replacement property from the EAT.
- The reverse 1031 exchange occurs when the EAT transfers the replacement property to you.
Conclusion
Due to more steps and people involved, a reverse 1031 exchange can be more complex and expensive than a delayed exchange.Â
You may also benefit from a reverse exchange if you have large amounts of equity in existing properties and believe it is the right time to diversify your portfolio:
As well as allowing you to remain in control of the process, reverse 1031 exchanges also allow you to take advantage of the fantastic investment opportunities available in multiple real estate markets today.