Front Leg Reverse 1031 Exchange Options - Switching It Up

Front leg reverse 1031 exchange

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

Financing

The financing may be too complicated to have an exchange accommodation titleholder acquire the new property. It may not be feasible to get it through the financing committee when banks are already very jittery and uneasy. In a declining market, the financing can be the lynch pin and we don’t want to upset the apple cart with very sensitive lenders.

Tax Incentives

Another reason you may not want to park the ownership of your new property in a holding company is you may want to get your hands on it right away because there might be tax incentives that go with the property. Perhaps there are low income tax credits, or other credits related to the stimulus package that may encourage you to get into the property as soon as possible. You will want to take advantage of those tax incentives. You don’t want to waste them on some holding company that is holding the property as inventory.

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.

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

Defer the tax. Maximize your gain.

 

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