The Reverse 1031 Exchange
We recently had a client need a reverse 1031 exchange.... so we figured a blog may in order as it's a foreign concept to many.
What is it?
Buy first, sell later — and still defer your taxes.
A standard 1031 exchange lets you sell an investment property and defer capital gains taxes by rolling the proceeds into a new one. The catch: you have to sell first. In a competitive market, that means potentially losing a great deal while you wait. The reverse 1031 exchange solves that problem, you buy the replacement property first, then sell your existing one.
How it works
Because IRS rules don’t allow you to hold title to both properties at once, a third party called an Exchange Accommodation Titleholder (EAT) — temporarily holds the new property while you sell the old one. Once the sale closes, the exchange is complete and you take full title. This structure is IRS-approved under Revenue Procedure 2000-37.
Key deadlines
• 45 days to identify the property you’re selling
• 180 days to complete the full exchange
Both clocks start when the EAT takes title. Miss either and the tax deferral is void.
Pros and cons
The main advantage is flexibility, you can act on a great property immediately without being forced to sell first. The downsides are cost and complexity: EAT fees, legal costs, and lender unfamiliarity can make the process more involved than a standard forward exchange. You also need enough liquidity to carry two properties temporarily.
Bottom line
A reverse 1031 exchange is best suited for investors who’ve found a deal they can’t afford to lose and have the capital to execute on. The added cost is real, but so is the tax deferral. Always work with a qualified intermediary and tax advisor before proceeding. We have those if you need them.
For more information on Snohomish County Commercial Real Estate brokerage and investment, you can reach us at:
Scott@weitzcommercial.com
t: (206) 306-4034
No comments:
Post a Comment