Tag: reverse exchange

In considering selling an investment property in a red-hot real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 exchange rules provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges.
Reverse 1031 Exchanges
Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “Improvement Exchange refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.
In this type of exchange, the exchange facilitator parks there placement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.
For example, an investor owns an apartment rental in Miami, Florida and wants to invest in single-family rentals. However, the only single-family rentals for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an

In considering selling an investment property in a red-hot real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 exchange rules provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges.
Reverse 1031 Exchanges
Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “Improvement Exchange refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.
In this type of exchange, the exchange facilitator parks there placement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.
For example, an investor owns an apartment rental in Miami, Florida and wants to invest in single-family rentals. However, the only single-family rentals for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an

View the entire 10 Steps of a Reverse Exchange Infographic.
Accruit, LLC is a national provider of

View the entire 10 Steps of a Reverse Exchange Infographic.
Accruit, LLC is a national provider of

View the entire 10 Steps of a Reverse Exchange Infographic.
Accruit, LLC is a national provider of

These TIC purchases often require commercial bank lending. For a 100% tax deferred exchange, the exchanger needs to make sure that all of the net proceeds from the sale of their old property are utilized for the TIC purchase. Additionally, any mortgage debt paid off from the sale of their old property must be replaced. Many of the commercial lenders for these TIC purchases require the bank lending be made to a Delaware LLC entity. This creates the requirement for the 1031 exchanger to have a single member LLC for each party of the exchange.
 

Check out the following lending issues prior to your 1031 exchange transaction:
1. Clean up the old property title by transferring it to your individual name. Mortgage portfolio lenders will not lend to living trusts, revocable trusts, partnerships, or limited liability companies. Remember that the IRS considers a single owner trust, a single member limited liability company or a husband and wife owned partnership as a disregarded entity. This means that you can transfer ownership back and forth with no federal tax effects and still obtain the mortgage lending. Be sure to check that you do not trigger a “due on sale clause” in your mortgage note when transferring such ownership back and forth.
2. Mortgage lenders understand the purpose of a 1031 exchange – investment property purchase. Do not try to obtain 2nd home mortgage financing for a 1031 replacement property. The underwriters will not fund a loan if you misrepresent the use of the property.
3. If proceeds from a mortgage loan cause an exchanger to receive cash at closing of the replacement property, the exchanger will incur a tax liability. Instead request to have your earnest money refunded or apply the excess as a principal reduction payment on the settlement statement to avoid capital gains tax.
4. When participating in a reverse exchange do not utilize a residential mortgage lender who sells their loans to other investors. Only commercial banks will lend to a Limited Liability Company (LLC) which acts as the parking entity for a qualified intermediary.
7. Be careful when you refinance to take money out of your old investment property. An exchanger should not obtain cash out refinance on their old property immediately before their 1031 exchange transaction. The IRS will not allow the