In a reverse 1031 exchange, the exchangor closes on their new replacement property before completing the sale of their old relinquished property. An investor can enter into a reverse exchange with almost every type of like-kind property.
Minneapolis Reverse 1031 Exchange
A reverse exchange is very helpful when you have found the new replacement property that you want, before you have closed on the sale of your relinquished-property.
Practice Tip: In a hot seller’s market, when it is very competitive to purchase suitable replacement, use a reverse exchange to lock-up a sure thing for replacement property before you sell your old relinquished property. That way you will be more likely to get the tax deferral that you desire, and you will have less stress in trying to identify and purchase your new replacement property within the 45 and 180 day deadlines.
Reverse Exchange in Action
An example of a reverse 1031 exchange would be an art collector who comes across a painting that they simply cannot pass up – let’s say it’s a rare, long-lost Picasso. The art collector agrees to purchase the painting on the spot, and then decides they’d like to sell one of the paintings they already own – perhaps a Van Gough – to offset the cost of the new Picasso. Since these two properties are like-kind (they are both paintings), the art collector could defer taxes on capital gains through a reverse 1031 exchange in this scenario. Like a forward exchange, the art collector would still have to abide by the 180 day rule in order to qualify. In this case, the art collector would have up to 180 days sell the old relinquished property (the Van Gough painting) to a third-party purchaser.
How to Structure a Reverse 1031 Exchange
There are two basic ways to structure a reverse exchange:
Back-Leg Reverse Exchange: The first method is to have an Exchange Accommodation Title-holder (or E.A.T.) acquire the new replacement property and “park” the ownership of it for you for up to 180 days.
Front-Leg Reverse Exchange: The second method is to have the exchange accommodation title holder liberate you from ownership of your old relinquished property and take title to your old relinquished-property, which then enables you to immediately purchase and receive your new replacement-property. Thereafter, it is necessary to find a third-party buyer to purchase the “parked” relinquished-property from the E.A.T. to complete the reverse exchange.
Each of these options is a short term solution authorized under Revenue Procedure 2000-37 for up to 180 days. The whole idea here is to “park” either the new replacement-property or the old relinquished-property until the ultimate buyer for the relinquished property comes along and closes on it.
Start Your Reverse 1031 Exchange in Minnesota
If you have entered into an agreement to purchase a new property and are considering selling an already held property, you too may defer taxes through a reverse 1031 exchange. Call our Minneapolis office today to talk to one of our 1031 tax professionals and see how you can defer the tax and retain the gain on your investment - 612.643.1031.