7 Steps to a Successful 1031 Exchange

In a reverse 1031 exchange, real estate investors can trade their old investment property for a new one without paying taxes on the gains. The process is reversed, as the new owner then purchases the old one first and sells it within 180 days.

The IRS allows real estate investors to defer taxes on their gains by making a reverse 1031 exchange with like-kind properties. In order to do this, they need to use a qualified intermediary. The investors also need to sign an accommodation agreement, which provides for the title of the new property to be held by the exchange titleholder for the duration of the swap.

There are various requirements that real estate investors need to follow in order to take advantage of a reverse 1031 exchange.

Unlike regular 1031 exchanges, the reverse exchange only works for investors who are trading their old investment properties. This type of exchange can only be used for rental properties and business properties. In addition to that, investors must follow certain rules in order to benefit from this type of exchange.

The property value of the new investment property should be at least as high as that of the old one. If the former’s market value is lower, the investors’ remaining gains from the sale will be taxed.

The seller must use the funds from the sale of their old investment property to purchase the new one.

The replacement and the relinquished properties must be regarded as like-kind. For instance, if a residential property is traded for another one, then the exchange becomes like-kind.

The investors must first identify the potential swap between their old investment property and the new buyer within 45 days after the purchase. The swap must then be concluded, and the old investment property sold within 180 days.

A reverse 1031 exchange is a type of tax-deferred investment property transfer. It allows real estate investors to sell their old investment properties without having to pay taxes on the gains.

An investor can quickly put their old investment property up for sale and focus on finding a new one with a reverse 1031 exchange instead. After identifying the ideal property, the process of the exchange works like this:

  1. After identifying a property to buy, the investor must then choose a titleholder who will be responsible for the new property’s title during the exchange period. They must also enter into a qualifying exchange agreement with an exchange intermediary together to outline the terms of the swap.
  2. The investor must then purchase the replacement property. They must ensure that it will be of the same or greater value as their old one. The investor can finance the purchase with a mortgage lender or use cash.
  3. Once the purchase has been completed, the exchange agent will take possession of the new title. This happens once the investor has made the required qualified exchange and closed on the deal.
  4. The investor then chooses to sell their properties or their investment properties. They must list their properties within 45 days after the purchase of the replacement property. The investor may sell up to three properties if they are selling them at the same price as the new one.
  5. The investor then selects a qualified intermediary to act as their representative. The QIs will then have the right, through their contract with the investor, to transfer the ownership of the relinquished asset to the new owner.
  6. The investor then enters into a contract with the buyer who is the seller of their old investment property. After finding a suitable buyer, they will then enter into a contract to sell the property. The investor must also list their old investment property as the seller.
  7. The investor sells the old investment property and closes on the purchase of the new one within 180 days. The exchange intermediary then takes possession of the new title and transfers it to the investor. This process can also result in the investor being able to benefit from a tax reduction.