{"id":4664,"date":"2022-07-01T14:40:20","date_gmt":"2022-07-01T14:40:20","guid":{"rendered":"https:\/\/loanbase.com\/uncategorized\/reverse-1031-exchange\/"},"modified":"2023-11-16T18:59:37","modified_gmt":"2023-11-16T18:59:37","slug":"reverse-1031-exchange","status":"publish","type":"post","link":"https:\/\/loanbase.com\/learn\/properties\/reverse-1031-exchange\/","title":{"rendered":"What is a Reverse 1031 Exchange and How Does it Work?"},"content":{"rendered":"

A reverse 1031 exchange is a complicated financial strategy that involves the purchase of like-kind property before selling an existing property. It can be an appealing option for investors who want to take advantage of favorable market prices. The process allows the purchase of a new like-kind property backed by the future proceeds from the sale of an existing property.<\/span><\/p>\n

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We will go over the advantages of a reverse 1031 exchange to better understand how it can be used as a sound financial strategy. <\/b>While there are advantages and disadvantages to this strategy, the tax benefits and ability to purchase in favorable market conditions may make it a beneficial approach when purchasing like-kind properties.<\/span><\/p>\n


\nWhat is a Reverse 1031 Exchange?<\/span><\/h2>\n

A traditional 1031 exchange is when an investor sells off a property and purchases a new property with those finances. <\/span>A reverse 1031 exchange works in the opposite way<\/b> \u2013 an investor purchases a property and sells off another property to fund the purchase.<\/span><\/p>\n

The investor has 180 days to sell the like-kind property. Funds are then used to pay for a new property without facing capital gains tax.<\/span><\/p>\n


\nHow does a Reverse 1031 Exchange Work?<\/span><\/h2>\n

A reverse 1031 exchange allows an investor to act on an enticing property immediately. It should be noted that the investor cannot hold the title of the new property until the existing property is sold. The title of the new property will remain with an Exchange Accommodation Titleholder (EAT) until the sale of the existing property is completed.<\/span><\/p>\n

A reverse 1031 exchange gives investors time to postpone capital gain taxes on their property.<\/span><\/p>\n


\nStructure of a Reverse 1031 Exchange<\/span><\/h2>\n

The <\/span>Revenue Procedure 2000-37<\/span><\/a> forbids the acting party to have complete ownership of both the relinquished property and the replacement property at the same time.<\/span><\/p>\n

There are two ways to approach the subject of a reverse 1031 \u2013 exchange last or exchange first.<\/span><\/p>\n

Exchange Last<\/span><\/h3>\n

The exchange last structure is the preferred strategy for both buyers and investors. It allows for more flexibility regarding the structuring and financing of the properties.<\/span><\/p>\n

In an exchange last structure, the acquired property is \u201cparked\u201d by the EAT. After the closure of the relinquished property, the 1031 is eligible to be closed.<\/span><\/p>\n

Exchange First<\/span><\/h3>\n

An exchange first approach is when the EAT takes possession of the relinquished title before the closing of the replacement property.<\/span><\/p>\n

This method requires significantly more cash on hand for the buyer and offers less flexibility in the structuring and financing of both properties in question.<\/span><\/p>\n

What is \u2018Parking\u2019?<\/span><\/h3>\n

This is an expression used frequently in discussions about reverse 1031 exchange.<\/span> Parking refers to the process of the EAT taking possession and holding onto the title of a property during an exchange.<\/b><\/p>\n


\nWhat Is the Process of a Reverse 1031 Exchange?<\/span><\/h2>\n

There are eight main steps in a reverse 1031 exchange. Below is the most common approach to a reverse 1031 exchange (an exchange last approach):<\/span><\/b><\/p>\n