1031 Exchange Types

When performing standard 1031 exchange transactions, the investment property sells first. After this sale, the seller buys a new piece of real estate. A reverse 1031 exchange allows you to buy the new property before selling the existing one.

IRS Revenue Procedure 2000-37 sanctions the reverse exchange “safe harbor” rule. This procedure provides a parking arrangement for investments. If a seller cannot sell the existing property within the standard 1031 exchange time frame, in that case, an Exchange Accommodation Titleholder (EAT) can hold title on the desired property until the first property sells. The seller is then able to take possession of the new investment parcel from the EAT.

Reverse Exchange Rules

• Reverse exchanges have a 180-day deadline. The 180-day countdown starts on the date the EAT buys the replacement property for the taxpayer/seller.
• Within 45 days after the purchase of a parked property, the taxpayer must formally identify the relinquished property(s).
• The EAT and the taxpayer must complete a Qualified Exchange Accommodation Agreement.

When is a Reverse Exchange Useful?

• The owner of the investment property finds the ideal replacement property before finding a buyer for the exchange property.
• The real estate investor needs to buy prime real estate as it enters the market.
• Real estate sellers wish to avoid identifying replacement property in the 45 days required by a 1031 exchanges
  

Forward Reverse Exchange

Financing involved? Often, a taxpayer considering a reverse exchange will not have the cash to fund purchasing the new replacement property and needs financing for the purchase. Depending on the lender’s financing structure restrictions, it may not be possible to park the replacement property in the name of the Exchange Accommodator Titleholder (EAT). The taxpayer may be able to structure a "Forward" or "Relinquished Reverse Exchange." Here, the taxpayer parks the relinquished property with the EAT rather than the replacement property in the EAT. Using this approach, the taxpayer transfers their interest in the relinquished property. Doing this allows them to buy the replacement property in their name. Certain restrictions apply for completing this type of exchange. 

Forward Reverse Exchange Rules

• In a forward reverse exchange, the EAT takes title to (or parks) the relinquished property. Doing this allows the taxpayer to directly acquire the replacement property. Exercise caution before deeding the property to the EAT if there is a loan on the relinquished property. This may not be an option if there is a loan on the relinquished property.
• Forward reverse exchanges have a 180-day deadline. The 180-day countdown starts when the EAT takes title to the relinquished property.
• Within 45 days after taking title of the parked property, the taxpayer must formally identify the replacement property to be acquired.
• The EAT and the taxpayer must complete a Qualified Exchange Accommodation Agreement.

Standard "delayed" 1031 exchanges involve the sale of a relinquished investment property and the purchase of a replacement investment property. A delayed exchange occurs when the replacement property closes within 180 days from the sale of the relinquished property. This is the most straightforward and common type of 1031 Exchange.

Standard 1031 Improvement Exchange 

SELL FIRST THEN BUY

In an improvement or construction 1031 exchange, the proceeds from the relinquished property sale are used to acquire the replacement property and make the desired improvements. This exchange is also known as a “Build-to-Suit” exchange.

The property must be held (parked) by an Exchange Accommodation Titleholder (EAT). The EAT must hold the property until either the improvements are completed, or the 180-day exchange deadline occurs. On or before the 180th day, the improved property must transfer to the exchanger as the replacement property.

Improvement Exchange Rules

• Improvement exchanges have a 180-day deadline starting on the sale of the relinquished property.
• Within 45 days of closing on the sale, the taxpayer must formally identify the replacement property(s) and desired improvements.
• EAT must take title to the replacement property while the improvements are made. (If the taxpayer were to take title to the replacement property, the value of the improvements would not be sheltered in the exchange).
• The EAT and the taxpayer must complete a Qualified Exchange Accommodation Agreement.

Reverse 1031 Improvement exchange

BUY FIRST THEN SELL

Reverse improvement exchanges allow the taxpayer to acquire the replacement property before closing on their relinquished property. These exchanges incorporate improvements to the replacement property to increase the property's value.