In a regular 1031 Exchange (sometimes referred to as a “forward exchange”), after you close the sale of your relinquished property, you must identify your replacement property within 45 days and close the purchase of your replacement property the earlier of the due date of your tax return for the year of sale or 180 days. If you do not identify (days) your replacement property within 45 days or you do not close on the replacement property you have identified within 180 days or due date of your tax return, whichever is earlier, there is no turning back and you must pay your capital gains tax. On the other hand, a reverse 1031 Exchange allows you to essentially eliminate the risk inherent in these forward exchange deadlines by buying your replacement property before you commit to sell your relinquished property.
The downside is that you must find a way to pay for the replacement property before you receive the proceeds from the sale of your relinquished property. This can be done from any source of funds you have available (cash, home equity loan, credit lines, mortgage on the replacement property or other property, etc.).
Reverse exchanges have been done for many years but there was no official sanction of such exchanges by IRS, so some conservative folks didn’t do them. In September, 2000, IRS finally gave us Revenue Procedure 2000-37 which officially approved such exchanges. So, more reverse exchanges are being done than ever before. About 25 percent of the exchanges U.S. 1031 Exchange Services assists with are reverse exchanges.
Reverse exchanges are sometimes referred to as “parking exchanges.” Since you cannot own both your relinquished property and your replacement property at the same time, the title to one of the properties must be “parked” with a third party temporarily. Either the title to the relinquished property can be moved out of your name before you take title to the replacement property (after which you continue your efforts to find a buyer for your relinquished property) or the replacement property can be parked with a third party while you continue to market your relinquished property. If you use U.S. 1031 Exchange Services for your reverse exchange, the third party with whom your relinquished property or replacement property is parked will be one of over 20 Florida limited liability company special purpose entities (SPE #1, LLC, SPE #2, LLC, etc.) which we have created solely for parking properties in reverse exchanges.
You may ask, if I do a reverse exchange, how do I decide whether to park the relinquished property or the replacement property? There are many considerations, and Mr. Riddell is happy to discuss the pros and cons with you. Some of the things to consider are whether you will need a mortgage to buy your replacement property before you receive the proceeds from the sale of your relinquished property (if so, in most cases we park the relinquished property because mortgage lenders are reluctant to make a mortgage loan on the replacement property if it is parked in a name other than yours), whether there will be less transfer tax resulting from parking one or the other property, where in the U.S. the relinquished and replacement properties are located and, if yours will be a multiple property exchange, are there more relinquished properties than replacement properties, or vice versa.
Our fee structure for reverse exchanges is simple. We charge a $1,000 surcharge over the otherwise applicable forward exchange fee (see our Fee Schedule in this website). For example, if your relinquished property sale price will be below $300,000, the total fee for a reverse exchange would be $1,700.
If you believe a reverse exchange is for you, please see paragraph 13 of the Questionnaire in “Getting Started” and fill in accordingly. Even though you give us advance warning that your exchange will or may need to be a reverse exchange, if it turns out that you get your relinquished property sale closed before the closing on your replacement property, your exchange will automatically revert back to a regular exchange and you will not be charged the $1,000 reverse exchange surcharge. You may, of course, also call Mr. Riddell at (941) 366-1300 to discuss and, per our Fee Schedule, if your best estimate of the sale price of your relinquished property is more than $1 million, please call Mr. Riddell to discuss and establish a total fee for the exchange services.