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.
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