Timing issues resolved with Reverse 1031s - by Patricia Flowers

Patricia Flowers, Investment Property Exchange Services

Do you have a timing issue? Are you moving your business to a new location and need to stay operational through it all? What would happen if you are planning to sell but find the ideal replacement property before you can sell and close on your current property? Paying taxes is not the perfect option…a Reverse Exchange could be the perfect solution. As the name implies, a §1031 Reverse Exchange is the opposite of a §1031 Delayed/Forward Exchange. In a Reverse, new replacement property is acquired before the investor sells their old relinquished property.

We are finding more and more that REITS, life insurance companies, businesses and individual investors are taking advantage of this strategy as added flexibility for tax deferral. Key steps to ensure a successful Reverse Exchange:

• Plan Ahead: A Reverse is more complex, therefore a greater amount of pre-structuring is required, so contact IPX1031 and your tax advisor as soon as possible.

• Closing: Do NOT close on any property without consulting us first. A Reverse Exchange MUST be set up prior to any closing.

• Lenders: If the investor 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 are unwilling to lend on this type of structure, so start those discussions early in the transaction.

• Cost: Reverse Exchanges are involved and incur more liability than a regular exchange and hence have higher fees. However, in most cases the cost of the Reverse transaction is a viable solution vs. the amount of depreciation recapture and capital gains tax being deferred.

• Improvements: When the replacement property needs repairs/improvements, a Reverse Exchange with a build-to-suit component is a possible option.

• Timing: Most rules that apply to Forward Exchanges also apply to Reverses including 45 day identification and 180 day completion time frames.

• Experience: If all of this information seems daunting, don’t worry. The IPX1031 team has the experience and expertise to help navigate IRS revenue procedures, rules and regulations.

As with all investments and wealth maintaining strategies, property owners are encouraged to seek the advice of legal and tax counsel, in conjunction with an Intermediary specializing in these transactions.

Patricia Flowers is vice president for Investment Property Exchange Services, Inc. (IPX1031), Boston, Mass.