The volume of 1031 Exchange transactions continue to rise year after year, but what’s also been trending is the sharp increase in the need for Reverse Exchanges. With limited available inventory and market aggressiveness, and for those who strategically want to secure the ideal replacement property prior to relinquished property closing, investment property owners may find themselves in a situation where a Reverse Exchange is the best investment option.

As the name implies, a Reverse Exchange is the opposite of a Delayed/Forward Exchange. In a Reverse Exchange, new replacement property is acquired before the investor sells their relinquished property. Since the taxpayer is not allowed to be on title to both properties concurrently, the Tax Code states an accommodation titleholder is necessary to step in and temporarily park title to one of the properties until the taxpayer can sell the other property and come off title, within the 180 day window. 

While this structure is more complex than a Delayed/Forward Exchange (sell first, purchase second), it gives taxpayers the advantage needed to make the most solid of investments. To ensure a successful §1031 Forward Exchange or Reverse Exchange, here are some key components to keep in mind:

Plan Ahead: 
Look for replacement property early and do not hesitate to negotiate that closing.

If you find you need or want a Reverse Exchange, it is more complex than a Delayed/Forward Exchange. Contact IPX1031 and your tax advisor as soon as possible to begin structuring it. 

Closing:
Do not close on any property without discussing the transaction with IPX1031 first.

If it may go Reverse, the Exchange MUST be set up and structured prior to any closing. IPX1031 must go on title to one of the properties (your purchase or sale) to avoid the problem of the taxpayer owning both properties at the same time.

Lenders:
In a Reverse, if the exchanger is borrowing money to close on the replacement property, the loan is actually made to the 1031 company, with the exchanger guaranteeing it. Some lenders are not familiar with or unwilling to lend on this type of structure, so it’s important to start those discussions early on in the transaction.

Cost:
To ensure that any type of exchange transaction is a viable solution, review the amount of depreciation recapture and capital gains tax being deferred with your tax advisor or attorney, such that the tax savings justify the transaction costs.

Keep in mind Reverse Exchanges are much more complicated than a Delayed/Forward Exchange and hence have higher fees associated with them.

Improvements:
When the replacement property needs repairs/improvements, either a Forward Exchange or Reverse Exchange with a build-to-suit component is a possible solution.

Timing:
45 day identification and 180 day completion time frames are in place, and most rules that apply to Delayed/Forward Exchanges also apply to Reverse Exchanges.

Although much different structure than a regular Forward Exchange, the Reverse is well worth it for taxpayers who will incur high capital gains/depreciation recapture tax upon their investment property sale, benefiting from the extra 6 months to get the current property sold. With the most experienced Reverse and Improvement Exchange Division, our group of attorneys and staff are dedicated solely to these structures to guide investors and their advisors through the process. 

Regardless of the type of 1031 Exchange you choose, we are always on call for you, standing by to help make your transaction a smooth process. For more details, call to ask for our Planning Ahead for a Successful Exchange and How to Initiate a Reverse Exchange discussions. As with all investments and wealth maintaining strategies, we advise you to seek the advice of your legal and tax advisors for your specific situation. IPX1031 is the largest national qualified intermediary providing a full suite of services for REITS, life insurance companies, businesses, entities and individual investors - your Section 1031 Exchange solution!

Patricia Flowers is vice president, Investment Property Exchange Services (IPX1031) and a Certified Exchange Specialist, Boston, Mass.