The Benefits of a Reverse 1031 Exchange in a Downward Market

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A downward market is where real estate values are declining and opportunities are rising; opportunities to buy real estate at a cheap price. Remember price is set by the market, value is established by the cash flow in an economic analysis. So, it is possible to buy a property at a price below its value and in the marketplace, if you find such an opportunity you want to seize on it immediately! You don't want to wait around; you want to buy it now!

Well, you say to me, I cant buy it now because if I do a 1031 exchange, the typical structure is that I sell and close on my relinquished property FIRST, and then SECONDLY, I buy my replacement property. If this great opportunity comes up, how can I take advantage of it and still avail myself of a 1031 exchange? A good example of this is if a bank takes back a property; they don't want to have it on its books. They have to reserve for it, they have to pay for expenses related to the property; they just want to get rid of that! They sell it at a deep discount; a discount below its actual value just to get it off their books. If you want to acquire that property, you have to move fast! You have to move before another investor moves in and takes it away from you and you will have to move in with money now! A strong cash offer will ensure you are the successful bidder.

Parking Your 1031 Exchange Property can be the Key Getting a Quick Good Deal

What you need to do is a reverse 1031 exchange. In a typical reverse exchange, your intermediary sets up an exchange accommodation titleholder. This is typically a LLC wholly owned by the intermediary and this holding company acquires the new property (for you). It purchases it and holds it so nobody else can get it. The IRS has laid out a safe-harbor in revenue procedure 2000-37. This is basically a recipe on how to do a reverse exchange. The best part of this deal (procedure ) is that you can have your intermediary take down this property. The bad side is, your intermediary can only park (own) this property and hold it for up to 180 days under the safe-harbor. That means, you basically have six months to unload or dump your old relinquished property.

The IRS 1031 Exchange Rules Favor Investors for Six Months

If the stars come into alignment, and you can get this great deal and park it with your intermediary, and take the next six months to market and get the highest and best price for your old property, you can really benefit. You can have your replacement property all teed up, ready and waiting for you, and then you dispose of your old relinquished property. Relinquished property sells, replacement property received, exchange is over, done! Exchange completed! Tax is deferred and YOU ARE A WINNER!

If You Don't Make It You Still Have 1031 Options for Another Real Estate Exchange

If the stars do not come into alignment (within six months), and you cannot unload your old relinquished property, it’s not the end of the world. You'll end up owning both properties. You can still do a 1031 exchange on your old relinquished property. But you will have to exchange into something else that you don't already own. At the end of the 180 days, your exchange accommodation titleholder is done holding it (parking is over); they will transfer it to you, so that it is your property now. You can’t exchange into something you already own, but it is still possible to exchange into something else.

  • 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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