When Should You Consider a 1031 Reverse Exchange?

When Should You Consider a 1031 Reverse Exchange?

A 1031 exchange allows you to defer paying taxes on any gain realized in the sale of investment property if you reinvest the proceeds into a new property. The IRS requires you to designate the replacement property within 45 days of the sale of the old property, and close on the new property within 180 days following the sale of the old property.

A 1031 reverse exchange allows you to acquire a new property before selling your current property and still defer any capital gains taxes. When you purchase the new property, you transfer title to “park it” until you sell the old property. After selling the old property, you regain title and defer any taxes on the gains from the sale.

However, a 1031 reverse exchange is not right for every investment portfolio, so take these things into consideration before proceeding:

Real estate market conditions.

Market conditions have a bearing on whether or not you will be able to complete a successful 1031 exchange. If your market is hot, you may want to consider using a 1031 reverse exchange to eliminate the need to identify a replacement property within the 45-day deadline following the sale of your current property. This will allow you to take the necessary time to find the best investment since you will acquire the replacement property before selling your existing property.

Financing.

1031 reverse exchanges work best if you have your own financing in place; if not, it can get tricky. If you will not have the funds available until your current property is sold, a Qualified Intermediary, acting as an Exchange Accommodation Titleholder (EAT), will need to be designated to hold title on either the old property or the new property. Owners are not allowed to exchange between their own properties. If you have to utilize an EAT for the new property, lenders may be unwilling to fund a bridge loan. This is why 1031 reverse exchanges usually work best for investors with existing funding.

Exchange timing.

The safe harbor rule for 1031 reverse exchanges requires that these transactions be completed within 180 days. Sometimes, if the new property needs improvements to bring it up to the value of the old property, meeting that deadline will not be feasible. Extending the exchange past 180 days creates a non-safe harbor exchange. This may trigger an IRS audit, so you need to be sure you have sufficient documentation to justify the extension.

Reverse exchange fees.

If the EAT fees associated with a 1031 reverse exchange will be more than your tax liability, you may want to consider a straight 1031 exchange.

The attorneys at Jurado & Farshchian, P.L., combines their knowledge and experience in the South Florida real estate market with a commitment to personalized, detail-oriented legal services. Contact one of our experienced Florida real estate attorneys at (305) 921-0440, or email us at info@jflawfirm.com

 Share

The post When Should You Consider a 1031 Reverse Exchange? appeared first on Jurado & Farshchian, P.L. Business Lawyer, Real Estate Lawyer, Immigration Lawyer.