What does Like-Kind in a 1031 Mean?

A structure where the replacement property is purchased first, prior to transferring (conveying or selling) the relinquished property to the actual buyer. The Internal Revenue Service provided guidelines (safe harbors) for structuring reverse exchange transactions, as outlined in Rev Proc 2000-37 effective September 15, 2000. Reverse 1031 exchange transactions structured pursuant to this Revenue Procedure are considered to be "safe-harbor" reverse 1031 exchange transactions and those structured outside of the Revenue Procedure are considered to be "non-safe harbor" reverse 1031 exchange transactions and should only be completed with competent legal counsel. Reverse 1031 exchanges are also referred to as parking transactions or parking arrangements.  An example of a non-safe harbor transaction is where it takes longer than 180 days to sell your relinquished property from your portfolio.

 As some people ask, the procedure is reverse. You call the QI, setup an EAT (an entity to hold title to your replacement property) and that EAT takes title until you divest your relinquished property.  The EAT actually assigns the interest to the exchangor.  There is a debate in many states as to whether boilerplate language in the EAT agreement can evade double transfer taxes for the exchangor. Pennsylvania currently is challenging that concept now. Many states allow the exchangor to insert language indicating the EAT is simply an AGENT for tax purposes and should not be viewed as a different owner (for tax purposes). 

Good question Tom, you may see them more than residential realtors because reverses are usually a minimum of $4,000 and hard to finance a purchase w/o sale of your relinquished.  You need a reverse exchange loan which is difficult to find...Wachovia does them though!

Karen:

Thank you for your candid response.  Just knowing a reverse exchange is possible is all most brokers/agents should execute for their client.  You are right that once the client asks you to opine on his or her transaction you may be doing that client a disservice.  However, in this market its easier to buy what you want to buy before you're able to sell what you have to sell.

James