1031 Exchange Question

[Warren Johnson]

I am interested in finding out if anyone would recommend a reverse 1031 exchange?... If you have an investment property you want to purchase and take the profit from one you own but you purchase the desired investment property before you sell the property you wish to sell and take the equity from to roll. I know this is the opposite of what is usually done?

I know it has to be titled in the bank's name and they get rent proceeds until your other property sells which it does have to sell in 6 months and you have an extra closing with costs associated. All of this may negate the tax free benefit of rolling the profit from one property to another?

I am assuming a property held for 2 years you are taxed capital gains at 20%. If the gain was 100k would you pay taxes on that full amount if you paid an agent $40k to sell it? Could you also carry forward rental income losses to the next property?

Thanks

[Lauren Speidel]

@Warren Johnson A Reverse 1031 Exchange can be a powerful tool if you have already found your replacement property but have not yet sold your relinquished property. Typically the QI would buy the replacement property on your behalf and park title to that property until you sell your current one. One of the largest hurdles is securing financing to purchase your replacement if you don't already have the funds available to you. Timeframes with a Reverse Exchange are the same as a Forward Exchange; you have 45 calendar days after you close on your relinquished to identify what you are selling and another 135 calendar days to actually close on that sale. Also keep in mind when you sell an investment property, most taxpayers pay around 30%-40% in taxes. Your capital gain tax is usually between 15-20%, you then have state tax, possibly Medicare surcharge at 3.8% and depreciation recapture at 25% so I would be mindful of those numbers as you execute your sale. Also, the broker's commission you pay is considered a permissible selling expense, therefore it will reduce your overall net sales price which means you're not taxed on that amount and it does not need to be replaced for a fully tax deferred Exchange. Reverse Exchanges are more complicated and have more moving parts so I would be aware that the cost to complete one is more expensive than a typical Forward Exchange.