Reverse 1031 Exchange.

[Stacy Hull]

Thinking about doing a reverse 1031 exchange but it sounds really complicated.  Does anyone have experience and tips on this?

[Dave Foster]

@Stacy Hull, The best way to think about a reverse exchange in a way that won't warp your head is to think of it as an additional component to a 1031 exchange.  A 1031 exchange starts with the sale of a piece of investment real estate and ends with the purchase of a piece of investment real estate.  That is the 1031 exchange.

But what if....

1. You find the perfect property you want to buy and your old property hasn't sold yet or

2. The property you want to buy will need significant improvements to equal the amount you need to spend in your 1031 or

3. The property you want to buy doesn't exist yet and you want to construct something.

Those are all times when a reverse exchange can help you out. Because the reverse part of the the exchange is where the QI forms an entity, usually an LLC, called the exchange accommodating title holder and that EAT takes title to the new property and holds it while it is improved, constructed, or your old property is sold. The property is under your control but not your ownership. So you can then sell your property and then do a regular 1031 purchasing the property from the EAT.

Yes, a reverse is more complicated and more expensive.  But sometimes it's the perfect tool.  The complexity is not an issue because a good QI will guide you through the entire process.  The issues you want to think about are..

1. Cost of the reverse vs the tax you'll be saving.  Reverses can be $3-5K in addition to a regular 1031.

2. Financing - The EAT will borrow money from you and from a bank.  But you are the guarantor and line up the financing.  This is not a product that a lender who sells on the secondary markets will be able to do.  This is a local community bank or private lender product.

3. Timing - From the day you start a reverse exchange you have 180 days to sell your old property and take title to the new property.