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Reverse 1031 Exchange Explained
How a reverse exchange works when the replacement property closes before the relinquished property sells.
What This Includes
A reverse exchange allows an investor to acquire a replacement property before the relinquished property sells, reversing the usual order of a 1031 exchange. Because an investor cannot hold title to both the relinquished and replacement properties at the same time and still complete a standard exchange, a reverse exchange relies on the safe harbor structure described in Revenue Procedure 2000-37, which uses an Exchange Accommodation Titleholder, often called an EAT, to temporarily hold title to one of the two properties.
In the most common structure, called an exchange last reverse exchange, the EAT takes and holds title to the replacement property while the investor continues to market and sell the relinquished property. Once the relinquished property sells, the exchange is completed and title to the replacement property transfers from the EAT to the investor. In an exchange first reverse exchange, the EAT instead holds title to the relinquished property while the investor closes on the replacement property directly, then works to sell the relinquished property out of the EAT structure.
The same forty five day identification period and one hundred eighty day exchange period apply to a reverse exchange, except the clock starts from the date the parking transaction occurs, when the EAT takes title to whichever property is being parked, rather than from a sale closing. Because the investor typically does not yet have proceeds from the relinquished property sale, reverse exchanges often require the investor to arrange interim financing, such as a bridge loan or hard money loan, to fund the replacement property acquisition through the EAT.
Reverse exchanges involve more moving parts and higher costs than a standard exchange, including EAT holding fees, financing costs, and additional legal documentation for the qualified exchange accommodation agreement. We help Albuquerque, NM investors evaluate whether a reverse exchange structure fits a situation where a strong replacement property becomes available before the relinquished property is ready to sell, and we coordinate the EAT, financing, and identification deadlines throughout the process.
What We Deliver
- Evaluation of whether a reverse exchange fits a given timing situation
- Coordination with an Exchange Accommodation Titleholder
- Structuring guidance for exchange first versus exchange last arrangements
- Calculation of the forty five day and one hundred eighty day deadlines from the parking transaction date
- Coordination of interim financing for the replacement property acquisition
- Preparation support for the qualified exchange accommodation agreement
- Coordination between the EAT, lender, and title company
- Planning support for unwinding the EAT structure once the relinquished property sells
Common Situations
FAQs about Reverse 1031 Exchange Explained
When would an investor use a reverse exchange instead of a standard exchange?
A reverse exchange is useful when a strong replacement property becomes available before the relinquished property has sold, and the investor does not want to risk losing that replacement property while waiting to close the sale. We help Albuquerque, NM investors evaluate whether this situation justifies the added cost and complexity of a reverse structure.
What is an Exchange Accommodation Titleholder?
An Exchange Accommodation Titleholder, or EAT, is an entity that temporarily holds title to either the replacement property or the relinquished property under the safe harbor described in Revenue Procedure 2000-37, since the investor cannot hold both properties at once and still complete a valid exchange. We help Albuquerque, NM investors set up and coordinate with an EAT.
Do the forty five day and one hundred eighty day deadlines still apply?
Yes. Both deadlines still apply in a reverse exchange, but the clock starts from the date the EAT takes title to the parked property rather than from a relinquished property sale closing. We help Albuquerque, NM investors calculate these deadlines correctly for a reverse structure.
How is a reverse exchange typically financed?
Because the investor usually does not yet have proceeds from the relinquished property sale, reverse exchanges are often funded with a bridge loan, hard money loan, or other interim financing arranged specifically to acquire the replacement property through the EAT. We help Albuquerque, NM investors coordinate financing timelines against the exchange deadlines.
Is a reverse exchange more expensive than a standard exchange?
Generally yes. Reverse exchanges involve EAT holding fees, additional legal documentation for the qualified exchange accommodation agreement, and often interim financing costs that a standard exchange does not require. We help Albuquerque, NM investors weigh these added costs against the benefit of securing a replacement property early.
What is the difference between exchange first and exchange last reverse structures?
In an exchange last structure, the EAT holds the replacement property while the investor sells the relinquished property directly. In an exchange first structure, the EAT holds the relinquished property while the investor closes on the replacement property directly. We help Albuquerque, NM investors determine which structure fits their situation.
Compliance and Limits
Educational content only. Not tax, legal, or investment advice. Reverse exchanges rely on the safe harbor structure described in Revenue Procedure 2000-37 under Internal Revenue Code Section 1031. New Mexico imposes a graduated state income tax on capital gains that are not deferred through a qualifying exchange. Consult with a Qualified Intermediary and a qualified tax advisor before making exchange decisions.
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