Wednesday, October 10, 2007

How Does A Reverse 1031 Exchange Work?

I had a client in the office yesterday with whom I have assisted in the disposition of rental properties, and the acquisition of a 30+ unit apartment complex. The question he and his wife had was on "reverse" 1031 exchanges.

The concept is relatively simple. It is, essentially, the opposite of a traditional 1031 tax-deferred exchange. The difference is that the investor is purchasing the replacement property "prior" to sale of the disposition property. But all the other rules remain. Here is how it works: The investor purchase the 1031 replacement property. A notation is made in the sales contract that the property is part of a 1031 tax-deferred exchange. The investor then has 45 days to identify the properties that are to be sold as part of the exchange, and 180 days (from the day the replacement property was purchased) to finalize the transaction(s).

As I stated at the top of the post, it is the opposite of a traditional 1031 exchange, but with the same rules.

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