What Is A Reverse 1031 Exchange?

A reverse 1031 exchange is not as straightforward as a deferred exchange, but does provide a certain amount of flexibility by allowing the investor to take control of a like kind replacement property before the old property has been relinquished. The reverse 1031 exchange rules and requirements are complex, but in certain circumstances it can be beneficial to set up a reverse 1031 exchange. For instance, these types of exchanges are useful to the real estate investor who is ready to close on a replacement property but still hasn't sold the old one. A reverse exchange may be set up to secure a replacement property and to avoid the chance of losing it. Another advantage of the reverse 1031 exchange rules is that investors eliminate the risk of not finding a replacement property within the strict 45 day time limit.

Some of the different types of reverse 1031 exchanges include:

1. Safe-harbor Reverse
This is where the new property is "parked" prior to the old property being sold. The same strict time constraints of a tax deferred exchange apply. The reverse 1031 exchange rules stipulate that the exchanger must identify the property to be relinquished within 45 days and complete within 180 days.

2. Traditional Reverse
This is where the time limits of a safe-harbor reverse have been exceeded. For example, if the old property has not been sold in time. This requires more work by a qualified intermediary to ensure the requirements of the IRS are met.

3. Construction Reverse
Under this type of section 1031 reverse exchange, the exchanger can "park" a piece of land or property to be developed or improved during the exchange period. This is an attractive option for many real estate investors because of the flexibility it allows.

4. Leasehold Improvement Reverse
This is where an exchanger builds on property that they already own, so the new building becomes the "parked" property. This is a complex strategy that is yet to be officially recognized by the IRS.

It is always advisable to seek professional advice on reverse 1031 exchanges or other tax issues by consulting a tax advisor or qualified intermediary who can assess your particular needs.