In previous articles, we detailed the intricacies of the 1031 Exchange, as well as the various interests invested in its success. Of particular note were the option’s: 1). convenience to real estate investors and 2). status as a tax-shelter. Below, we discuss a variation on the original that’s likely to pique your interest— the Reverse 1031 Exchange. But first, let’s perform a quick review of the original option.
The 1031 Exchange: a Brief Review
A 1031 Exchange basically refers to a “swap” of one investment, asset, or business for another; and most involve exchanging various forms of real estate.
While in other instances this practice would be taxable as a sale (and you’d have to pay those taxes immediately), if the exchange falls under section 1031 of the tax code (i.e. it qualifies as a “like-kind exchange”), you’re able to defer them.
Also of note, as it regards this option, is how the property which you are exchanging for (i.e. the one you’re giving up) is relinquished prior to the acquisition of your new property.
Aiding Your Long-Term Investing Goals
Clearly, this option plays to investors’ long-term goals by allowing them the flexibility to:
1. get rid of under-performing assets.
2. generate greater amounts of income.
3. build larger portfolios.
But what about the lesser-known Reverse 1031 Exchange option? What’s in it for you?
The Reverse 1031 Exchange
The Reverse 1031 Exchange is the opposite of its original version (or the “Delayed Exchange”). Whereas the latter requires investors to relinquish their property(ies) before acquiring any new one(s), the reverse option allows for the acquisition of new property (ies) first (while the relinquishing can come after). This distinction is a subtle but important one, as we shall see.
- Ability to take advantage of changes in the marketplace (like buying a hot property that’s only available for a limited time).
- Helps if you want to relinquish your existing property, but lack a buyer.
- A way to avoid the IRS requirement that says the new property must be identified within 45 days of the old one’s closing.
However, the Reverse option is not without its own set of rules and requirements, which should be studied carefully beforehand.
Who Should act
As stated previously, 1031 Exchange’s are geared toward investors who crave convenience, tax benefits, and portfolio growth; so if you’re best described as an investor who detests “staying pat” while preferring to stoke the fires of their ambition, this option may be a good fit. The Reverse 1031 Exchange only serves to give you added flexibility when it comes to meeting your investing goals. So let the wheeling and dealing begin!