What Is a Reverse 1031 Exchange?

Real estate investors bought 90,000 properties in the third quarter of 2021. They’re betting that rental prices and real estate values will continue to climb.

Real estate or property investment. Home mortgage loan rate. Saving money for retirement concept. Coin stack on international banknotes with house model on table. Business growth background

It’s quite a bet, but what if you want to cash out on your investment and purchase another? You can capitalize on a section of the tax code that allows you to defer capital gains taxes.

The Internal Revenue Code lets you defer capital gains taxes through a 1031 exchange. A reverse 1031 exchange is a way to grab an opportunity and realize the tax benefits.

It’s not a magic pill, but a legal way to lower your tax bill. Are you ready to learn more?

Keep reading to discover the ins and outs of a reverse 1031 exchange.

What Is a Reverse 1031 Exchange?

Section 1031 of the tax code refers to 1031 exchanges. These are like-kind property exchanges that let you defer capital gains taxes on the sale of business real estate properties, whether they’re investments or business properties.

In a delayed exchange, which is the standard procedure for 1031 exchanges, an investor must sell a property and then purchase a like-kind property.

These things must occur within certain timeframes. Investors must identify another property within 45 calendar days of the sale of the initial property.

They then have 180 calendar days after the sale of the property to close on the new property.

A reverse 1031 exchange allows investors to purchase a new property first, then relinquish the property or properties. In both cases, you have to use a qualified intermediary to complete the transactions.

What to Know About a Reverse 1031 Exchange

The IRS does have deadlines with reverse 1031 exchanges. Investors have to identify the properties they plan to relinquish within 45 days after the acquisition of new property.

You also have to close on the sale within 180 days of the sale of the property.

The reverse 1031 exchange holds a few advantages for investors. If they spot a hot property that won’t last long on the market, they can initiate a reverse 1031 to grab the property right away.

Investors also have to identify an exchange accommodation title holder (EAT), which holds the title of the new property while the investor sells the old property.

Investors also work with a qualified intermediary on the sale of the old property. This allows the proceeds of the sale to go to the qualified intermediary. If the investor receives the proceeds of the sale directly, they have to pay taxes.

This allows you to avoid paying capital gains taxes until you cash out on your real estate investment.

For a reverse 1031 to work, investors either have to have enough cash on hand to purchase the new property without having to sell the initial property. If there isn’t enough cash on hand, they’d have to find hard money equity lenders willing to work with a reverse exchange.

Know the Internal Revenue Code

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