The Orginial Realty Investing Magazine

Real estate investors understand the power of a #1031 exchange for deferring capital gains. By selling existing investment or business property and then replacing it with “like kind” property, capital gains tax can be deferred (in some cases indefinitely). This also gives an investor more immediate capital to invest into bigger and better properties.

But what happens when an investor finds the ideal replacement property before they sell their existing investment property? Do they have to pass up the opportunity to acquire the perfect new investment simply because they haven’t sold their unwanted property? No.

An investor simply needs to understand and implement a “reverse exchange.”

A reverse exchange allows an investor to acquire replacement property before selling relinquished property. Of course, the IRS imposes strict compliance rules surrounding reverse exchanges. Provided that an investor adheres to these safe harbor provisions, the validity of the reverse exchange should be assured.

Holding Title: Title to the replacement property must be held by the qualified intermediary (QI) upon purchase. The QI will continue to hold title until the sale of the relinquished property is completed, at which time title for the replacement property will transfer to the investor.

Five Day Rule: A “Qualified Exchange Accommodation Agreement” must be entered into between the investor and the QI within five business days after title to the property is taken by the QI in anticipation of a reverse exchange.

45-Day Rule: The relinquished property must be identified within 45 days of acquiring the replacement property. Just as with the more traditional delayed exchanges, more than one relinquished property can be identified, so long as the same rules (Three Property Rule, 200% Rule, 95% Rule) are followed.

180-Day Rule: The entire reverse exchange must be completed within 180 days of the QI taking title to the replacement property.

But what happens if the investor cannot find a buyer within the 180 days? There are a few options. The investor can simply terminate the exchange, take title to the replacement property and deal with any capital gains taxes when/if they sell the relinquished property (presuming they don’t attempt another exchange later).

Alternatively, the investor can continue with the reverse exchange outside the protection of the safe harbor provisions noted above. The safe harbor time limits are not mandatory in a reverse exchange. However, when an exchange does not comply with these rules, the exchange is at a higher risk of challenge, audit and potential rejection by the IRS.

If a 1031 exchange is in your future, visit our website to learn more about these powerful tax deferral tools and our qualified intermediary and replacement property locator services.

Views: 0


You need to be a member of REALTY411 to add comments!

Join REALTY411


Our investment publication is owned by active real estate investors. Our free educational network was created to help readers grow wealth.


What kind of deals are you doing right now? We want to know!

Started by Realty411 Magazine. Last reply by Hanni G. Oct 19, 2010. 9 Replies

Tell us what kind of deals you are doing right now? What is succeeding in today's market for you?We want to know all about it! Our goal is to help others with our knowledge.Thanks!Continue

Save up to $9,600 for every employee you hire.

Started by Larry Potter. Last reply by Larry Potter Jun 20. 1 Reply

Hello,Keeping businesses informed of new or expanded Federal Tax Programs is very important to us. We’ve identified a tax credit that Client Company immediately qualifies for and want to reach out to you personally.This program falls under the…Continue

Tags: Stryde, Solutions, GMC, Credit, Tax

Unsecured USA Business Lines - Funding in 10-15 days

Started by Larry Potter. Last reply by tyree mcIntyre Jul 15, 2013. 1 Reply

* $50K- $100K or More* No collateral required* No financial or tax returns* We work…Continue

Tags: lines, funding, business, unsecured


Started by Daniel Williams. Last reply by Samuel Rodriguez Jun 16, 2012. 1 Reply

We have the right funding for YOU!WE FINANCE... Golf Course~Shopping Centers~Self Storage Units~Multi Family/Apartments Buildings~Construction~Office Buildings~Gas Stations~Refinance~Resturants~Funeral Homes~Hotels/Motels~Hotels Resorts and…Continue

New Fannie Mae Guidelines - IF YOU BUY FORECLOSURES, this is YOU!

Started by Chris Donaldson. Last reply by Ben Van Gaasbeek Jun 10, 2010. 1 Reply

We got this news yesterday and thought I would share with anyone who has not seen the release.  Title Defect – Mortgage Loans Secured by Properties Subject to Unexpired Redemption PeriodCertain state laws provide for a "redemption period" after a…Continue

Tags: Guidelines, Fannie

Microcap fund

Started by Williamhawk Dec 4. 0 Replies

hello,Any recommendations? If we get a healthy pullback (though it’s hard to remember what one of those looks like) I am thinking of adding some SC or MC. I’ve had FDM on a watch list for some time ... I can’t recall why but last year I thought that…Continue

© 2017   Created by Realty411 Magazine.   Powered by

Badges  |  Report an Issue  |  Terms of Service