Reverse Exchange

Call Louis or Renae Jennings at 407-592-2315

Benefits of the Reverse 1031 Tax Exchange

When a taxpayer needs to purchase their replacement property prior to the closing of their old relinquished property a "reverse 1031 exchange" is the best alternative to save a 1031 tax deferred exchange. An IRS ruling allows for a safe harbor for a reverse 1031 exchange providing that the following conditions are met: 

1. Taxpayer enters into a "Qualified Exchange Accommodation Agreement" with the qualified intermediary that states that the taxpayer intends to meet the requirements of Section 1031 and Revenue Procedure 2000-37. This agreement needs to be entered into within 5 days of when the qualified intermediary purchases the replacement "new" property.
    
2. The party holding the "new" parked property must be a qualified intermediary or a limited liability company under the intermediary’s control.
    
3. There must be proof of intent for the parked property to be part of the exchange.
    
4. Within 45 days of the purchase of the parked property, the taxpayer must complete a 45-day identification form listing the parked property as one of the identifications.
    
5. The parked property must be transferred to the taxpayer on or before the 180th day from the date of acquisition by the qualified intermediary.

This ruling also allows for the taxpayer to:

1. Advance funds to the qualified intermediary to acquire the parked property.
    
2. Guarantee the debt used to acquire the parked property.
    
3. Manage the replacement property during the parking period.
    
4. Supervise construction and improvements on the parked property.

Advantages Of Reverse 1031 Exchange

With this ruling taxpayers can take advantage of this safe harbor for reverse exchanges. For reverse exchanges that take longer than 180 days, an exchange may still be successful, but if the taxpayer is ever audited by the IRS, it is not certain whether they will accept it. A Title Holding or Reverse Exchange is usually structured as follows: Using funds from sources arranged by the investor,

Bankers Escrow Corporation acquires title to the Replacement Property under a special purpose company under the terms of a sale and a purchase contract negotiated by the investor. The funds for the purchase may be advanced to Bankers Escrow Corporation by the investor and secured by the Replacement Property with a Note and a Deed of Trust. There also could be a combination of the investor’s funds and a bridge or purchase money financing from a third party secured by the Replacement Property and guaranteed by the investor.

Bankers Escrow Corporation "warehouses" the Replacement Property until the sale of the Relinquished property is ready to close. At that time, the investor exchanges its interest in the Relinquished Property for Bankers Escrow Corporation’s interest in the Replacement Property. Bankers Escrow Corporation then immediately closes the sale of the Relinquished Property, and the investor or other lender is repaid the funds used to acquire the Replacement Property.

Usually, the Replacement Property is leased to the investor during the period of time that Bankers Escrow Corporation holds title. Using a “triple net” lease, the investor has the use and enjoyment of the Replacement Property, and must insure and maintain the property, pay all expenses of the property, and has the rights to all rents and other income (if any) from the property.

Investors should appreciate the risks in engaging in a Title Holding or Reverse Exchange, and consult with their tax advisor before deciding to engage in this type of exchange transaction. Especially if the time period exceeds 180 days. Traditional parking arrangements can be set up with your QI  for reverse exchanges exceeding 180 days.  CSI has a list of QI's to interview.  Prices for these services are usually a few hundred to a few thousand dollars predicated on the size and complexity of the deal and you should get at least 2 quotes from industry recognized companies.

If you would like information on how net leased investment work then please visit the following link to our World Wide Web site: http://www.renaejennings.com/Navagation/nnn-info.htm

NOT TO BE CONSTRUED AS TAX OR LEGAL ADVICE. IF TAX OR LEGAL ADVICE IS NEEDED, AN ATTORNEY, ACCOUNTANT OR OTHER QUALIFIED COUNSEL SHOULD BE CONSULTED.

For fast, professional results, pick up that 1,000 pound phone and call
Louis or Renae Jennings at 407-592-2315

email:  investments@cfl.rr.com  

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