Reverse 1031 Exchange

[Ron Drake]

I am trying to figure out the logistics for a possible 1031 exchange in the future on a rental house I bought in 2002.

I may buy a new house and that would be one of the reasons for doing a reverse exchange. I don't think most new home builders will cooperate with an exchange otherwise.

if I buy the replacement property first, do I have 180 days to sell my existing property? Are there other deadlines to meet?

Is it acceptable to do a cash out refi on existing rental property prior to the 1031 exchange. Does this count as boot or are there seasoning requirements on this money?

Any insight is appreciated by all.

@Bill Exeter 

[Bill Exeter]

Hi Ron,

Builders will cooperate with a 1031 Exchange, but generally only pursuant to their project management schedule, and if they miss their completion deadlines it could mean a failed 1031 Exchange on your behalf depending on your deadlines.

The Reverse 1031 Exchange would allow you to buy the replacement property first and not have to worry about the builder's schedules, and then you would have 45 calendar days to identify what you are going to sell as part of the transaction and 180 calendar days to complete the sale. 

Reverse 1031 Exchanges are more complicated and the fees are greater, but it eliminates much of the risk in terms of timing.  The ease of structuring the Reverse 1031 Exchange will depend on whether it is an all cash purchase and whether there are any obstacles that would prevent the Qualified Intermediary from holding (parking) title to the acquired property. 

You must have the intent to reinvest into replacement property, so you must also be careful when refinancing property.  It is possible to refinance the relinquished property, but I would make sure that all of the refinance proceeds go toward the purchase of the replacement property.  I would not commingle the loan proceeds with any other funds.  I would have the funds sent directly to the replacement property closing.

The challenge is to find a lender that would be willing to lend on the relinquished property knowing that it will be sold in a few months.  You might have to look at bridge financing, hard money or private money lenders.