Reverse 1031 Exchange rules

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A reverse 1031 exchange allows investors to acquire a replacement property before selling their relinquished property, inverting the typical sequence of a 1031 exchange. This strategy is useful when an investor needs to secure a new property quickly, even before selling their current one, while still deferring capital gains taxes.

Here’s a breakdown of the reverse 1031 exchange process:

1. Engage a Qualified Intermediary (QI) and an Exchange Accommodation Titleholder (EAT):

• • A QI, also known as a qualified intermediary, is crucial for facilitating the exchange and ensuring compliance with IRS regulations.
  • An EAT, typically a single-member LLC, is created by the QI to temporarily hold title to the replacement property, preventing the investor from owning both properties simultaneously, which could jeopardize the tax-deferred status.

2. Acquire the Replacement Property:

• • The EAT, using funds provided by the investor (either directly or through financing), purchases the replacement property.
  • This is the first step in the reverse exchange process, hence the name.

3. Identify the Relinquished Property:

• • The investor has 45 days from the date the EAT acquires the replacement property to identify the property they intend to sell (relinquished property).

4. Sell the Relinquished Property:

• • The investor has 180 days from the date the EAT acquires the replacement property to sell their relinquished property.
  • The sale proceeds are then used to pay off any loans on the replacement property and/or reimburse the investor.
  • The QI (through the EAT) receives the sale proceeds from the relinquished property.

5. Transfer Ownership:

• • Once the relinquished property is sold, the EAT transfers ownership of the replacement property to the investor.
  • This transfer can be done by assigning the ownership interests in the LLC or by conveying the title directly.

6. Completion:

• • The reverse 1031 exchange is completed when the investor receives ownership of the replacement property.