Conducting Reverse 1031 Exchanges in a Seller’s Market

Right now, it’s a hot seller’s market. As a result, we’re seeing a lot of reverse 1031 exchanges. At the moment, it’s really easy to be the seller of a piece of real estate. It’s much harder to be the buyer because it’s so competitive. Inventories are tight and there’s a lot of competition for the same property. If you find a replacement property that you really want, the smartest move may be to put your energy into buying the replacement property first in a reverse 1031 exchange.

How a Reverse Exchange with a Qualified Intermediary Works

In a reverse exchange, most often a qualified intermediary forms an LLC and purchases the replacement property on the taxpayer’s behalf. Rather than having the taxpayer grant a mortgage to the lender, the intermediary’s LLC is the buyer of the replacement property and grants the mortgage to the lender. The taxpayer may funnel the down payment in, but the intermediary is the one who acquires the property and holds it for up to 180 days so that the taxpayer has time to sell their relinquished property. When that happens, the intermediary takes the replacement property that they’ve already purchased and passes it to the taxpayer to complete their 1031 exchange.

This is beneficial to the taxpayer because they don’t have to sweat the 45 day identification period as much because the replacement property is already locked in.

Reverse 1031 Exchange Company

If you’re thinking about doing a reverse 1031 exchange, don’t hesitate to reach out to the qualified intermediaries at CPEC1031 today to learn more about how we can help. We’ve got more than twenty years of experience facilitating exchanges and can help you defer your capital gains taxes. Contact us today at our Minneapolis office to seat up an appointment!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Essential Actions to Take After a 1031 Reverse Exchange

After a reverse exchange is completed and a replacement property that was parked by the intermediary has been conveyed to the taxpayer, the business may not be done. There may still be some administrative tidying up that needs to be done.

Change of Address

For example, the LLC that parked and held title to the replacement property may have been assigned to the taxpayer, but the records with the Secretary of State may still reflect the intermediary’s address as the business address of the LLC and as the registered agent. One administrative step after the reverse exchange is done is to file a new annual report with the Secretary of State reflecting the correct address and who is the new registered agent of the LLC.

If the address where the county tax statements are being sent to is showing as the intermediary’s address, the local county may continue to send the tax bills to the intermediary’s address rather than to the taxpayer. So another item to tidy up is to file or notify the local tax assessor where you want your tax statements and tax bills to be sent to in the future.

Notify the IRS

It may also be prudent to contact the IRS and notify them that the ownership of the LLC has substantially changed and request a new EIN number for the LLC.

These are little administrative items that are prudent to take immediately after the reverse exchange has been wrapped up. It's important not to delay too long because otherwise correspondence and important communication may be routed to the wrong address and the taxpayer may not receive that information for some time.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

A Creative Alternative for Failing Reverse 1031 Exchanges

Reverse 1031 exchanges are a great option for taxpayers who wish to acquire replacement property before selling their relinquished property. But what happens if, for whatever reason, your reverse exchange is in jeopardy? In this article, we are going to offer up a creative alternative option for a failing reverse 1031 exchange.

A Creative Alternative

A creative option for a failing reverse exchange can be found in IRS Private Letter Ruling 200712103.

Assume that you are parking your new replacement property with the Exchange Accommodation Title Holder. In the event that an actual third-party purchaser can’t be found to purchase your relinquished property (the old property) within the 180 days, it may be possible to “manufacture” a “White Knight” buyer that is dissimilar to the taxpayer doing the 1031 exchange. In this arrangement, you could have a “white knight” purchase the old relinquished property from you to get it off your books within the 180 day reverse exchange period. The white knight will then act as temporary owner of the relinquished property until such time that the property is later sold to a third-party purchaser.

To be treated as the owner for tax purposes, the White Knight will need to have sufficient incidents of ownership of the relinquished property, so it will be conveyed the property by deed or contract for deed. In PLR 200712103, the Internal Revenue Service ruled that a taxpayer doing a safe-harbor reverse exchange (under Rev. Proc. 2000-37) could sell its relinquished property to a "related party" (but dissimilar taxpayer) and that this related party could also subsequently market and sell the relinquished property without having to hold the property for two (2) years. 

A Note on Private Letter Rulings

Private letter rulings are a written statements issued to specific taxpayers that interprets and applies tax laws to those taxpayer’s represented sets of facts. A PLR is issued in response to written requests submitted by taxpayers. A PLR may not be relied on as precedent by other taxpayers or by IRS personnel, but may give insights into how other taxpayers are dealing with similar situations.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Tips for Paying Down Debt on Your Replacement Property

Many taxpayers wonder: “Can you pay down debt on a Replacement Property you’ve already acquired in order use up all of your 1031 exchange funds?” In this article, we’re going to talk about some planning tips for protecting your 1031 exchange in this type of scenario.

1031 Exchange Planning Tips

If you find yourself in this 1031 exchange position, there are some strategies to protect yourself and your exchange, such as:

• Holding off on closing on your more certain Replacement Property purchases until you have decided if you can buy the other less certain Replacement Properties…thus keeping your options open as to how much of your 1031 funds you will apply to the first purchases until you know if the other Replacement Properties will work out.

• Doing a reverse exchange on the first Replacement Property purchases and having the title to the Replacement Property held by an E.A.T. (exchange accommodation title holder) that is owned by your Qualified Intermediary, until you have determined if the other Replacement Property will materialize.

Reverse 1031 Exchanges in Minnesota

With a reverse exchange, because the taxpayer is not the “owner” of the parked replacement property during the reverse exchange period, you maintain the option of applying all or a part of your remaining exchange funds to purchase and/or pay-down of the debt encumbering the parked replacement property BEFORE you actually receive the parked property from the E.A.T. to complete your 1031 exchange.

Contact a 1031 Exchange Company

At CPEC1031, LLC we have over twenty years of experience facilitating like-kind exchanges all over the united States. Contact us today to learn more about our services and how we can help you with your next 1031 exchange!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

What Exactly is a Safe Harbor Reverse 1031 Exchange?

In the year 2002, the IRS finally issued a Revenue Procedure for conducting reverse exchanges. It's a very taxpayer-friendly rev proc in that the intermediary can form an entity to acquire either the new replacement property and hold it until the relinquished property is disposed of, or alternatively the intermediary can acquire title to the old relinquished property and hold it, and allow the new replacement property to be immediately received by the taxpayer.

180 Day Holding Period

In either instance, the IRS limited this holding period to 180 days under the safe harbor. They were mirroring the requirements that are in the straight exchange regulations that limit deferred exchanges to 180 days. The major criticism or limitation of rev proc 237 is that it only allows the parking arrangement with the intermediary to go on for 180 days.

When to Use a Reverse Exchange

But if you have to acquire your replacement property before you've had a chance to get rid of your old relinquished property, a reverse exchange can be a very effective tool to allow your acquisition to still be part of a 1031. Furthermore, in a hot seller's market where it's really really hard to buy because there's lots of competition for properties, and it's really easy to sell, many savvy investors will use a reverse exchange to acquire the replacement property in a reverse exchange so they’ve got a sure thing to exchange into, and then they'll use their 180 days thereafter to offload or dispose of their old relinquished property.

Get Help with Your 1031 Exchange

Get help with your next 1031 exchange of real estate by reaching out to CPEC1031, LLC. Our qualified intermediaries have been providing like-kind exchange assistance to clients throughout the state of Minnesota and across the country for over two decades. You can find us at our primary offices in downtown Minneapolis.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved