The first thing that we should probably address when beginning a discussion of reverse 1031 exchange transactions is why an investor would want to use a reverse 1031 exchange.  They are more sophisticated, complicated, and expensive than a traditional or regular forward 1031 exchange transaction after all, so why should we even both with them. 

Why Would You Use a Reverse 1031 Exchange? 

The real estate market has changed considerably over the last few years, especially the residential real property market.  The amount of real property inventory on the market has increased significantly because properties are taking much longer to sell.  And, the market is also showing an increase in the number of properties that are falling out of escrow, especially with the mortgage and capital markets in such turmoil today, therefore creating additional obstacles for 1031 Exchange transactions.

Real estate markets like this make planning, structuring and coordinating 1031 Exchange transactions even more challenging.  It can also make you feel like you have lost control of your 1031 Exchange, especially if you have already lined up the acquisition of your like-kind replacement property and are having difficulty getting buyers excited about purchasing your relinquished property.

It's Time to Regain Control of Your 1031 Exchange

Fortunately, help is available.  There is a 1031 Exchange strategy that can alleviate some of the risks associated with structuring your 1031 Exchange transaction in challenging real estate markets such as this.  It's called a reverse 1031 exchange.

IRS Issues Revenue Procedure

The Internal Revenue Service issues Revenue Procedure 2000-37 on September 15, 2000 that provided us with a "parking arrangement" that can be used in structuring a so called reverse 1031 exchange transaction.  They have been structured prior to this, but we now have guidance from the Treasury Department so that the risk of knowing whether the reverse 1031 exchange would be allowed has been eliminated. 

The reverse 1031 exchange can help put you back in the drivers seat and in control of your 1031 exchange transaction.  The reverse 1031 exchange allows you take as much time as you need to locate and acquire suitable like-kind replacement property first with out worrying about the 1031 Exchange deadlines associated with a forward 1031 exchange. 

One of the most difficult challenges with a forward 1031 exchange is meeting the required 1031 Exchange deadlines.  However, when you acquire your like-kind replacement property first through a reverse 1031 exchange your 45 calendar day identification period is generally not an issue.

Reasons to Use a Reverse 1031 Exchange

There are many reasons why you might find yourself in a position where you must acquire or would prefer to acquire your like-kind replacement property first before the sale of your relinquished property using a reverse 1031 exchange. 

Some of the reasons include:

Perhaps you just want to eliminate the stress (and risk) involved with the stringent and restrictive 1031 exchange deadlines by taking advantage of the reverse 1031 exchange strategy and acquiring your like-kind replacement property first.

Or, you might unexpectedly stumble upon an investment opportunity that you must acquire and close on before you even have time to consider selling your relinquished property.

The sale of your relinquished property may unexpectedly collapse and you may not want to risk losing your like-kind replacement property and must therefore proceed with the acquisition. 

Institutional investors often structure each and every acquisition as a reverse 1031 exchange and then subsequently decide whether they will sell and match any relinquished properties as part of their reverse 1031 exchange. 

Many investors have switched to this strategy exclusively in order to provide them with more flexibility when structuring real estate acquisitions. 

Stay tuned for Post No. 3, which will start off with a discussion of how the reverse 1031 exchange help investors reduce their risk in completing a 1031 exchange transaction.