The Benefits of a Reverse 1031 Exchange

SAN FRANCISCO — IRC Section 1031 exchanges have been around since 1921, but up until 1980, you basically had to buy and sell on the same day, which made it a difficult feat to pull off. After 1984, the rules changed: exchangers now had a 45-day period following the close of escrow on a relinquished property to identify a replacement property. While this continues to be the case with 1031 exchanges today, finding the right property within 45 days can be quite challenging, especially with the complexity of today’s market.

One way to address this is with a safe harbor reverse Section 1031 exchange, which is a transaction that’s facilitated via an Exchange Accommodation Titleholder (EAT). First, your Qualified Intermediary will set up an EAT to buy and hold the property you wish to purchase and “park” it for you. You’ll need to identify the Relinquished Property you’re selling with the EAT, and you must complete the sale and purchase of your Replacement Property from the EAT within 180 days following its purchase of the parked property. This gives you more control over the timing of your transaction and eliminates the 45-day period to identify a Replacement Property in a regular deferred exchange, since it has already been identified and parked for you. 

A reverse exchange is a more expensive transaction than a regular 1031 exchange because it involves a lot more work, but it also provides several advantages. Having additional time to manage your exchange enhances your negotiating power for both your purchase and sale, which typically produces an economic benefit in your favor. Since you have the opportunity to purchase the right property at a price that fits your long-term needs, you reduce the risk of failing your exchange and becoming a taxpayer.