Overview of Reverse 1031 Exchanges

This article will provide you with a very brief and concise overview of reverse 1031 exchange transactions.  You can learn more about reverse 1031 exchange transactions by reading our in depth article entitled Introduction to Reverse 1031 Exchanges, which includes more detailed information on reverse 1031 exchange structures, strategies and compliance issues. 

1031 exchange transactions, especially reverse 1031 exchanges, are complex income tax-deferred strategies.  You should always seek competent legal, financial and tax counsel before entering into any forward or reverrse 1031 exchange transaction.  Exeter Reverse 1031 Exchange Services, LLC is always available to assist you in planning your reverse 1031 exchange.

Reverse 1031 Exchanges

There are many reasons you might find yourself in a position where you must acquire or would prefer to acquire your like-kind replacement property first in your 1031 exchange.  You might unexpectedly find an investment opportunity that you must act on before you even have time to consider selling your relinquished property.  The sale of your relinquished property may unexpectly collapse and you do not want to lose your acquisition that is closing soon.  Or, you may prefer to buy first to eliminate the pressure of having to identify your like-kind replacement property within the 45 calendar day identification deadline in a regular forward 1031 exchange. 

What ever your reason for deciding to purchase your replacement property first, the reverse 1031 exchange allows you to acquire your like-kind replacement property first and then subsequently sell your relinquished property within the prescribed 1031 exchange deadlines.  It can be a great strategic tool when needed or preferred.

Revenue Procedure 2000-37

The Internal Revenue Service issued Revenue Procedure 2000-37 on September 15, 2000, which provides guidance on how to properly structure a reverse 1031 exchange transaction by using a parking arrangement in conjunction with a simultaneous 1031 exchange.

Simultaneous 1031 Exchange

The actual 1031 exchange portion of your reverse 1031 exchange transaction will be a simultaneous or concurrent 1031 exchange at the beginning or end of your reverse 1031 exchange.  You will enter into a 1031 Exchange Agreement with Exeter 1031 Exchange Services, LLC as your Qualified Intermediary for the administration of your 1031 exchange.

Parking Arrangement

You will enter into another agreement called the Qualified Exchange Accommodation Agreement ("QEAA") that will structure the parking arrangement for your reverse 1031 exchange.  The QEAA is signed by you and Exeter Reverse 1031 Exchange Services, LLC as your Exchange Accommodation Titleholder ("EAT").  The Exchange Accommodation Titleholder ("EAT") is the entity that will acquire and hold or "park" title to either your relinquished property or your like-kind replacement property during your reverse 1031 exchange transaction.

Reverse 1031 Exchange Structures

The challenge in structuring your reverse 1031 exchange is deciding which of your investment properties will be acquired and held or "parked" by Exeter Reverse 1031 Exchange Services, LLC as your Exchange Accommodation Titleholder ("EAT").  The structure selected by you will depend on whether there is financing involved and which investment property your lender will allow Exeter Reverse 1031 Exchange Services, LLC to hold or park title to.

The two structures are commonly referred to as Exchange Last and Exchange First because the simultaneous 1031 exchange occurs either at the beginning (Exchange First) or at the end (Exchange Last) of your reverse 1031 exchange transaction.

Exchange Last Structure

The Exchange Last reverse 1031 exchange structure is the preferred strategy because it will provide you with the most flexibility in terms of structuring and financing your reverse 1031 exchange transaction.  It also provides you with more advanced structuring capabilities. 

Your like-kind replacement property is acquired and held or "parked" by the Exchange Accommodation Titleholder ("EAT") and a simultaneous or concurrent 1031 exchange is completed later at the close of your relinquished property sale transaction (i.e. the simultaneous 1031 exchange occurs at the back-end of your reverse 1031 exchange).

The primary obstacle with this structure will be your lender.  Lenders are concerned about the Exchange Accommodation Titleholder holding or parking title to the like-kind replacement property that will be used as collateral for the loan.  We recommend scheduling a conference call between you, your lender and Exeter Reverse 1031 Exchange Services, LLC as early as possible to determine whether this reverse 1031 exchange structure is viable.  You may need to shop around for lenders who are willing to work with you.  We can certainly assist you with this.

Exchange First Structure

The Exchange First reverse 1031 exchange structure will keep your lender happy, but will eliminate your flexibility in terms of structuring and financing the acquisition of your like-kind replacement property and any advanced 1031 exchange planning capabilities.

Your like-kind replacement property will be acquired directly by you, your lender will lend directly to you on the acquisition of your like-kind replacement property, and simultaneously you will transfer title of your relinquished property directly to Exeter Reverse 1031 Exchange Services, LLC as your Exchange Accommodation Titleholder (i.e. the simultaneous 1031 exchange occurs at the front-end of your reverse 1031 exchange).

The difficultly with this structure is that you must temporarily advance (i.e. reinvest) the total amount of your equity that is currently trapped in your relinquished property into your like-kind replacement property up front before your relinquished property sale actually closes.  This kind of cash liquidity is usually not available. 

You can explore the differences between the Exchange Last and Exchange First structures in greater detail by clicking here.

Special Purpose Entity

We set-up a special purpose entity in the form of a single member limited liability company that will be used exclusively for your reverse 1031 exchange.  The sole purpose of this entity is to acquire and hold or "park" title to your property.

Reverse 1031 Exchange Deadlines

Deadlines for your reverse 1031 exchange are essentially the same as in a forward 1031 exchange transaction.  You have 45 calendar days to identify what you are going sell as your relinquished property, and you have an additional 135 calendar days — for a total of 180 calendar days — to complete the sale of your identify relinquished property and close out your reverse 1031 exchange. 

Reverse 1031 Exchange Fees and Costs

Reverse 1031 exchanges are more complicated and costly, so you need to review the amount of depreciation recapture and capital gain income tax liabilities being deferred to ensure that the cost of the reverse 1031 exchange transaction is justified.  We would be happy to provide you with a written reverse 1031 exchange fee quote so that you know exactly what you are looking at in terms of fees and costs prior to getting started.

Getting Started

This article is a basic and concise overview of reverse 1031 exchange transactions.  You can click here for more detailed information regarding reverse 1031 exchanges, or click here for more information on how you can get started if you are ready to proceed with a reverse 1031 exchange or click here to contact one of our 1031 Exchange Advisors for assistance.

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Reverse Exchange 1031