Reverse 1031 Exchange
A variation on the standard 1031 exchange known as a reverse 1031 exchange, also known as a reverse like-kind exchange, enables an investor to buy a replacement property before selling the original property. The usual procedure for a reverse 1031 exchange is as follows:
Set up a purchase agreement with the seller for the property you want to buy to replace the current one.
To hold title to the replacement property in an exchange accommodation titleholder (EAT) entity, such as a single-member LLC, you must find a qualified intermediary (QI) to serve as a neutral third party.
Close the sale of the replacement property and give the EAT company the title. The QI will only have temporary ownership to the new property, usually 180 days.
Identify the original property, complete the sale, and deposit the sale money into the QI account.
Pay for the acquisition of the replacement property with the money from the sale of the previous one.
To demonstrate adherence to the guidelines for a reverse 1031 exchange, complete all required papers and file documentation of the exchange with the IRS.
Reverse 1031 swaps, it should be noted, can be more complicated than standard 1031 exchanges, and there are stringent requirements that must be met in order to be eligible for a reverse 1031 exchange. Before moving forward with a reverse 1031 exchange, it is always wise to seek advice from a skilled tax practitioner.