As an investor, you might be familiar with a 1031 exchange. You can sell one investment property and reinvest the money into another through this tax-deferred exchange without paying capital gains taxes on the sale.
But have you heard of a reverse 1031 exchange? This is a less common type of 1031 exchange that allows you to acquire replacement property before selling your current property. In this blog post, we’ll look at the reverse 1031 exchange timeline and what you need to know about this strategy.
Let’s take a look at 1031 Exchange Basics.
First, let’s review some basics about 1031 exchanges. As mentioned, a 1031 exchange is a tax-deferred exchange that allows you to sell an investment property and also reinvest the proceeds into another property without triggering capital gains taxes. This is a powerful way to defer taxes and grow your real estate portfolio.
There are several rules you must follow to complete a 1031 exchange. For example:
- The properties being exchanged must be held for investment or business purposes.
- The replacement property must also be of equal or more excellent value than the sold property.
- The exchange must be completed within specific timeframes, including identifying the potential replacement properties within 45 days of the sale of the relinquished property and completing the exchange within 180 days.
What Is a Reverse 1031 Exchange?
Now, let’s dive into the reverse 1031 exchange. As the name suggests, this type of exchange reverses the typical timeline of a 1031 exchange. Instead of selling your current property and using the proceeds to acquire a replacement property, you receive the replacement property first and then sell your existing property later.
There are several reasons why you should consider a reverse 1031 exchange. For example, if you’ve found the perfect replacement property but have yet to be able to sell your current property, a reverse 1031 exchange allows you to move forward with the acquisition without waiting for the sale to close. This can be especially helpful in a competitive real estate market where properties may sell quickly.
Reverse 1031 Exchange Timeline
So, what does the reverse 1031 exchange timeline look like? Here are the key steps:
Identify a Qualified Intermediary (QI)
Like with a standard 1031 exchange, you’ll need to work with a Qualified Intermediary (QI) to facilitate the exchange. The QI will hold the funds and help ensure the exchange complies with IRS rules.
Acquire the Replacement Property
Using funds from a lender or another source, you acquire the replacement property before selling your current property.
Park the Current One
Since you haven’t sold your current property yet, you’ll need to “park” it with an Exchange Accommodation Titleholder (EAT) until you’re ready to sell. The EAT holds legal title to the property while you continue to manage and maintain it.
Sell the Current
Once you’ve acquired the replacement property and parked your current property with the EAT, you can sell the existing property at your convenience.
Complete the Exchange
Once you’ve sold your current property, you have 180 days to complete the exchange by transferring the title of the replacement property from the lender or other source to yourself. This completes the reverse 1031 exchange.
A reverse 1031 exchange can be a powerful tool for real estate investors, allowing you to acquire replacement property before selling your current property. However, it is essential to understand the rules and timelines involved in this type of exchange.