In this 1031 FAQ video, Jeff Peterson talks about reverse 1031 exchanges within the safe harbor. Watch more 1031 educational videos here.
In the year 2002 the IRS finally issued a Revenue Procedure for conducting reverse exchanges. It's a very taxpayer friendly rev proc in that the intermediary can form an entity to acquire either the new replacement property and hold it until the relinquished property is disposed of, or alternatively the intermediary can acquire title to the old relinquished property and hold it, and allow the new replacement property to be immediately received by the taxpayer.
In either instance the IRS limited this holding period to 180 days under the safe harbor. They were mirroring the requirements that are in the straight exchange regulations that limit deferred exchanges to 180 days. The major criticism or limitation of rev proc 237 is that it only allows the parking arrangement with the intermediary to go on for 180 days.
But if you have to acquire your replacement property before you've had a chance to get rid of your old relinquished property, a reverse exchange can be a very effective tool to allow your acquisition to still be part of a 1031. Furthermore, in a hot seller's market where it's really really hard to buy because there's lots of competition for properties, and it's really easy to sell, many savvy investors will use a reverse exchange to acquire the replacement property in a reverse exchange so they’ve got a sure thing to exchange into, and then they'll use their 180 days thereafter to offload or dispose of their old relinquished property.
For more information on the steps involved in reverse exchanges check out: http://www.cpec1031.com/blog/whiteboard-video-reverse-1031-exchange-tips
- 1031 Hotline: If you have questions about reverse 1031 exchanges within the safe harbor, feel free to call me at 612-643-1031.
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