IRC § 1031 Exchanges and Reverse Exchanges

Section 1031 of the Internal Revenue Code establishes the rules for a taxpayer to defer the payment of taxes upon the sale of an investment or business property. The taxpayer doing a 1031 Exchange can defer payment of the following taxes:

• 25% Federal tax rate for the recapture of depreciation (Section 1250 Recapture)
• 15% Federal capital gains tax rate
• State Capital Gains taxes (example; 9.3% in California)

The traditional forward exchange requires that the sale of the existing “relinquished” property be followed within 180 days by the acquisition of its replacement. However the flexibility to acquire the replacement property first, before selling the relinquished property, is a relatively recent innovation and is growing in popularity. When Rev. Proc. 2000-37 introduced Safe Harbor provisions in September 2000, reliable guidelines for a “Reverse Exchange” became available to the professional exchange community.

A reverse exchange transaction is structured utilizing a Qualified Exchange Accommodation Agreement. It requires the use of an Exchange Accommodation Titleholder (EAT) and is typically structured as a limited Liability company (LLC). The EAT takes title to either the relinquished property or the replacement property. You are employing the services of this website because your EAT is taking title to your replacement property, in what is commonly called “Parking” the replacement property.

This issue of title to the Parked property is what usually causes problems for mortgage lenders. The typical “residential” investment property lender will not consider funding a mortgage that is titled in an LLC, especially one in which you or your company is not the owner (member) of the LLC. Fortunately, our service is to directly refer your financing needs to a mainstream lender that will fund your replacement property inside of an EAT. Due to the LLC and other design similarities of an Improvement Exchange, our lenders can also consider financing your parked property while you make improvements during the 180-day window.

Links, Information and Resources

A simple search of the internet can yield a wealth of up-to-date, well written and pertinent information on 1031 Exchanges. The websites of professional 1031 firms usually contain descriptions, Q&A sections, or procedural summaries covering Reverse Exchanges. Reverse 1031 Financing Solutions works with many of these professionals, most of whom are members of the Federation of Exchange Accommodators (FEA) which is fast becoming a fully self-regulated industry.
The FEA website, at www.1031.org, contains a State by State member locator for 1031 exchange professionals and firms, their websites plus individual email addresses.

Reverse Exchange Information

With permission of Investment Property Exchange Services, Inc., selected summaries of topics related to Reverse Exchanges are linked here for your convenience:

Reverse Exchanges
How to Initiate a Reverse Exchange
Section 1031 Treasury Regulations
Exchange Terminology
Exchange Closing Costs
Complete Brief Exchange Booklet

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Reverse Exchange Financing Articles

Financing your Parked Residential Replacement Property: 3 Scenarios
By Frank Haentschke

What Makes Financing a Reverse Exchange so Difficult?
By Frank Haentschke

A Closer Look at How Financing Works in a Reverse 1031 Exchange
By Gary Gorman