Author: Heather Connor, Realtor
The Reverse 1031 is a powerful tool that many don’t often realize that it’s available to them
It’s going to sound very similar to a typical forward exchange except the difference is that you are performing the steps in reverse. There are going to be a few things to be mindful of, such as the fact that the cost of an Intermediary and Exchange company or the Special Purpose Entity (SPE) is going to be significantly more expensive. They will have to be more skilled and perform more steps, but the positive aspect of it is that it gives you a lot more leverage in a market that would be considered a typical seller’s market.
As long as you have the finances or resources to be able to purchase the replacement property first, this is a really powerful tool.
10 STEPS TO A 1031 REVERSE EXCHANGE
1. The taxpayer enters into a contract to purchase a replacement property
2. The taxpayer enters a reverse exchange agreement with a Special Purpose Entity (SPE), typically a new LLC, created specifically to accommodate the exchange by holding the title to the replacement property.
3. The taxpayer assigns their replacement property to the SPE.
4. The taxpayer and/or lender loans money to the SPE for the purchase of the replacement property.
5. Through the reverse exchange agreement, the SPE agrees to transfer the replacement property of the taxpayer upon the conclusion of the transaction.
6. The taxpayer closes on replacement property and takes ownership.
7. The taxpayer enters into a contract for the sale of the relinquished property and also enters a standard tax-deferred exchange agreement with the Qualified Intermediary (QI). relinquished property sale closes within 180 days of the replacement property’s closing.
8. The taxpayer directs the QI to disburse funds from the exchange account for the purchase of the replacement property from the SPE.
9. The SPE takes any and all funds received and uses them to repay acquisition financing made by the taxpayer. The balance of funds, if any, is used to pay down any loans from the prime lender.
10. The taxpayer pays the replacement property from the SPE.
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