The reverse exchange timeline outlined in the Revenue Procedure 2000-37 is identical to the reverse exchange timeline outlined in IRC 1031. Failure to adhere to the 45-day and 180-day time limits doesn’t disqualify the transaction, but the exchanger forfeits the benefit of the safe harbor presumptions.
In real estate, a reverse exchange is the polar opposite of a delayed/forward exchange. If you find a replacement property before selling the current one, you can use a reverse exchange. While this structure is more complicated than a delayed/forward exchange (sell first, buy later), it may allow you to maximize your tax deferral.
Most people familiar with 1031 exchanges are conversant with the standard forward exchange. This exchange involves selling the relinquished property first and then acquiring the replacement property. More real estate investors are beginning to ask, “What is a reverse 1031 exchange?”
In real estate, swapping investment properties to achieve deferred capital gains is referred to as a reverse 1301 exchange. The investment property you swap to defer capital gain and follows the IRC code section 1031 is known as reverse exchange real estate.
Reverse exchange 1031 is a tax deferral strategy that, for various reasons, requires that you purchase the replacement property before the transfer of property or the selling of old property.
It’s more complex than Forward 1031 and requires careful planning, but the reverse exchange timeline follows the standard 1031 exchange rules. We have outlined the 1031 reverse exchange rules in this article. Read to the end!
1031 Reverse Exchange Rules
Advance planning is required when utilizing a 1031 tax-deferred exchange. The reverse 1031 exchange rules are:
Replacement Property of Greater Than or Equal Value
To get the most out of a 1031 exchange, real estate investors should choose a replacement property or multiple replacement properties equal to or better in value than the one they sold. Start by listing up to three properties, regardless of their value, or identify as many as you like, as long as the total value of all of them doesn’t exceed 200 percent of the property you’re replacing, or identify as many houses as you like, as long as the properties you purchase are worth at least 95 percent of the ones you replaced.
The Dreaded 45-day Identification Window and Why Planning Ahead Pays Off
Real estate investors must prepare ahead when arranging a 1031 exchange. Due to the IRS’s 45-day deadline for locating a replacement property for the one you sold, you’ll need to act swiftly.
However, intelligent real estate investors don’t wait until they sell their present property before beginning their search for a replacement home.
Imagine calling a real estate broker to help you get a replacement property within two days. There’s a slim chance to the non-existent probability of getting a suitable property.
Within 180 Days, a Replacement Property May be Purchased
The reverse exchange timeline is 180 days after selling the present property. Keep in mind that 180 days doesn’t equal six months. The IRS keeps track of every day, including weekends and holidays, to compute the 180 days (including federal holidays).
Mortgage of Property in a 1031 Exchange
Additionally, a 1031 exchange can be done for a currently mortgaged property. Mortgages for replacement properties must be equivalent to or greater than those on the sold property. If it is less, the difference is taxed.
A Reverse 1031 Exchange’s Eligible Characteristics
A 1031 exchange’s “like-kind” requirement is a critical aspect of a successful transaction. This section will discuss the properties that qualify for a reverse like-kind exchange. These properties below are eligible for 1031 exchange treatment.
Residentials involve properties ranging from single-family houses to apartments, duplexes, condominiums, and townhomes for vacation rental. These properties are the most prevalent sort of 1031 exchange.
Many properties qualify, including convenience stores, gas stations, shopping malls, strip centers, parking lots, golf courses, marinas, nursing homes, and office buildings.
Exchange treatment is available for farmland, including ranches, and mixed-use principal dwellings on land.
1031 exchanges are permitted for land trusts and conservation easements.
Oil, Gas, Mineral, Water, and Ditch Rights
Oil, gas, mineral, water, and ditch rights are eligible if a perpetual interest is involved. Royalties are considered tangible personal property and hence qualify.
Delaware Statutory Trusts (DST) or Tenants in Common (TIC)
Ownership by multiple parties is permitted, including TIC and DST interests.
How Can I Qualify for Tax Deferral if I Sell My Property?
Any Qualified Intermediary can qualify you. IRC 1031 allows you to sell your property, buy a new one and defer payment of taxes. Just follow the specific rules. A qualified broker can help you qualify and take advantage of the tax-free 1031 exchange.
What Exactly Are the Tax Advantages of the Exchange?
You can eliminate capital gains tax payments and pay higher taxes on depreciation claims you earn on property. By exchanging yours for a higher value property, you’ll also get additional depreciation deductions that can increase your after-tax income.
Potential Difficulties in Performing a Reverse 1031 Exchange
Securing a loan is one of the difficulties in a tight credit market. Those with cash or access to cash have the freedom to act rapidly without being constrained by lenders. The disadvantage of a 1031 reverse exchange is that it results in the ownership of two assets if the old asset doesn’t sell within 180 calendar days.
Transfer tax may be charged when the title is transferred to or from the Exchange Accommodation Titleholder (EAT). Certain states acknowledge the EAT’s role as the taxpayer’s agent and don’t levy a tax.
Often, an assignment of the taxpayer’s membership interest in the EAT makes sense. The taxpayer’s replacement property is parked with the EAT and then conveyed to the taxpayer to avoid paying transfer tax. Each state is unique, and the Qualified Intermediary must understand and advise the taxpayer accordingly.
In a reverse exchange, you can buy a new property before selling your property. All you need is a qualified broker that will take title to the new property you purchased. Then the broker holds the title until you sell yours.
180 days is the reverse exchange timeline for real estate. You have 180 days between the closing date of the property sold and the property purchased. Suppose you’re still interested in getting more information on 1031 reverse exchange, click on this link https://www.buynnnproperties.com/reverse-1031-exchange/. Goodluck!