Front Leg Reverse 1031 Exchange Options - Switching It Up

Sometimes in a 1031 exchange, it is not advantageous to park your new replacement property. Here are a few potential reasons.

How Do We Structure the Deal So You Can Get Into the New Property as Soon as Possible?

To get you into your new property as soon as possible, we structure the transaction as a front leg reverse exchange (this is also sometimes called an exchange first reverse exchange). That means, we have the exchange accommodation titleholder (the LLC) take title to your old relinquished property. That gets the property out of your name and frees you up. Now you are no longer tied to that (old) property and this allows you to immediately acquire the new replacement property.

After that, you still need to find a (real) buyer for the old relinquished property. The 1031 intermediary holding title through this LLC can only hold on to the property for 180 days (per Rev. Proc. 2000-37).

Rush to Sell Your old 1031 Exchange Property within 180 Days

You will need to market the relinquished property and hopefully a third party purchaser will acquire the property from the intermediary. The Intermediary doesn’t have any money of its own, so it would have borrowed that money from you or from a bank with your guarantee. So, it behooves you to get the intermediary out of title and get the new purchaser in so you or your lender can get paid off and you can be free of the guarantee.

Reverse Exchange Advantages

In a tight market you can’t wait around. You need to seize opportunities when they arise. A reverse exchange is another tool to get the deal done tax deferred. It allows you to purchase a property by having your exchange accommodation titleholder acquire either the new property or alternatively, take title to your old relinquished property, thus freeing you up to immediately acquire this new replacement property. Reverse exchanges are excellent and powerful tools, but they are sophisticated creatures. You need to have your CPA, your tax attorney and all your other advisors on board to get these deals done correctly.

• Start Your Exchange: If you have questions about reverse exchange options, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Video – An Explanation of the 1031 Exchange Identification Rules

If you want to do the easiest 1031 exchange identification rule (the 3 property rule), you identify three or fewer properties. You could identify the IDS Center, the Foshay Tower, and the Mall of America. It doesn’t matter that these three properties are extremely expensive. What matters is that they are three properties. There is no valuation cap when using the three property rule.

There’s an alternative rule that you can use called the 200% rule. With this rule you can identify more than three properties but you have a value cap. If you sell your relinquished property for a million dollars, using the 200% rule you double the value of your relinquished property to find your ceiling, which would be 2 million dollars in this example.

Lastly, there is the 95% rule. This rule is typically only used when identifying a big portfolio of properties. Under this rule, as long as you actually receive at least 95% of the value of your identified properties, your 1031 exchange is still valid.

Find a 1031 Intermediary to Help with Your Like-Kind Exchange

If you’re searching for a qualified intermediary you can trust to help with your 1031 exchange, look no further! CPEC1031, LLC has the skills and experience needed to ensure your like-kind exchange is a success. We have more than twenty years of experience facilitating exchanges under section 1031 of the Internal Revenue Code. We can help you through all the steps of your like-kind exchange of real estate. Contact us today at our downtown Minneapolis office to learn more. We work with clients throughout the state of Minnesota and across the United States.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2026 Copyright Jeffrey R. Peterson All Rights Reserved

Front-Leg Reverse 1031 Exchange Example

There are ways to structure reverse 1031 exchanges that don’t complicate the replacement property and allow you instead to offload your relinquished property. That being said, cash is always king. In order to make this work from an accounting perspective, you need to have enough cash to loan to the intermediary’s LLC to cover what would be your net proceeds.

Imagine you have a property that’s worth $500K. You had a buyer lined up to do a 1031 exchange, but they flake at the last minute. What are your options?

You can have the qualified intermediary form an LLC that enters into an agreement with you to acquire your property subject to the existing mortgage. You loan the LLC $100K (because you have a $400K mortgage). That LLC then sends the $100K to the qualified intermediary as 1031 exchange funds and you sign a deed conveying title to the LLC. Essentially, you have financed the buyer to acquire your property subject to the existing debt that was already there. Also, the cash that you loaned to the entity goes to the qualified intermediary, who eventually sends that cash to the closing of your replacement property. On the settlement statement for the closing of your replacement property, it will show a credit of $100K of exchange funds for your 1031 exchange. You close on the replacement property as you ordinarily would in a forward exchange and everyone is happy.

At that point you have 180 days to find a legitimate purchaser for your unsold relinquished property. Let’s say another buyer comes along and offers to buy the property in less than 180 days. That buyer closes on the relinquished property and we deed the property to them. That buyer’s $500K goes to pay off the existing $400K mortgage on the property and the remainder of the funds go to you to reimburse you for the $100K that you previously advanced to the LLC.

1031 Exchanges Can Reduce Your Capital Gains Tax Burden

A 1031 exchange can significantly reduce your capital gains tax burden when selling qualifying real estate. Many savvy investors utilize this tax code provision and you can too! Reach out to the qualified intermediaries at CPEC1031, LLC today to see if your property qualifies. We are well-versed in all aspects of section 1031 (from forward to reverse exchanges and everything in between). Let us help you through the 1031 exchange process and start deferring your capital gains tax burden today!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2026 Copyright Jeffrey R. Peterson All Rights Reserved

How to Problem Solve 1031 Exchanges Involving LLCs

Perhaps the most important and misunderstood topic when it comes to 1031 exchanges is LLCs.

Many people own real estate together, often in an LLC. A multi-member LLC can be taxed as a partnership, or it can elect to be treated as a corporation for tax purposes.

In the partnership realm, you have a lot of options when it comes to dividing up the property. Let’s say that you’ve recently enjoyed a step-up in basis after your ancestor died and you inherited their partnership shares with a stepped-up basis. You are probably fine doing a taxable sale because your step-up in basis means you have very little gain. The other partner who has been in the LLC from the beginning has very low basis and does not want to do a taxable exchange – they would prefer to do a 1031 exchange. How do we deal with that in the context of an entity owning the property?

One way to deal with it is to do a simple drop-and-swap in which you take the LLC and deed the property out to the partners as tenants-in-common. This option comes with some level of risk.

An alternative would be for the 1031 exchange-minded partner to stay in the LLC and do the exchange under its banner. If the other partner wants to leave the LLC, you can do a redemption and deed that partner out as a tenant-in-common, while still keeping them in the partnership (perhaps at just 1% ownership) so that the LLC retains its partnership characteristics. If your partner does not agree to this arrangement, concurrent with their departure from the LLC, you could simultaneously gift 1% to your spouse or someone else so the entity still retains two owners.

708 Spin-Off

You could also do what’s known as a 708 spin-off. In this arrangement, the original LLC spins off a subsidiary containing half of the real estate. That subsidiary is owned 99% by you and 1% by your old partner. The old LLC is then owned 99% by your old partner, and 1% by you. Both of these LLCs have the same DNA and can do separate 1031 exchanges.

Contact a 1031 Exchange Company

Contact a 1031 exchange company like CPEC1031, LLC today to get your 1031 exchange up and running. Section 1031 allows you to defer taxes when selling like-kind qualifying real estate. It presents a fantastic opportunity for investors to lever up into a bigger investment, move capital around into different areas, and defer capital gains taxes along the way. If you’d like to learn more about how a 1031 exchange can help you, contact the qualified intermediaries at CPEC1031, LLC to learn more about the process and see if you are a good candidate.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2026 Copyright Jeffrey R. Peterson All Rights Reserved

Video – How a 1031 Exchange Allows You to Keep Deferring Until You Die

Throughout your lifetime you never want to unnecessarily recognize capital gains taxes. With a 1031 exchange, you can continue deferring your capital gains tax burden until you die.

When your heirs inherit your property upon your passing, they get a step up in basis. Rather than getting the low basis that you had in the property during your lifetime, your heirs receive the property with a basis stepped up to the fair market value. It’s almost too good to be true.

Get Your Like-Kind Exchange in Motion

Begin the process of deferring your capital gains taxes with a like-kind exchange today by contacting CPEC1031, LLC. Our qualified intermediaries have decades of experience working on 1031 exchanges of all shapes and sizes across the United States. We can help answer your questions, assist in document preparation, and make sure you are ready when it comes time to close on your property. Reach out to our team of 1031 exchange professionals today at our Twin Cities office located in the heart of downtown Minneapolis.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2026 Copyright Jeffrey R. Peterson All Rights Reserved