Types and Features of 1031 Reverse Exchanges
Perhaps the reverse exchange is the result of the buyer backing out of a previously arranged simultaneous exchange or the seller forcing a premature closing on the replacement property. In any event, the taxpayer completes the replacement leg of the exchange first.
This is accomplished by using the buyer of the relinquished property or an outside party, known as an accommodator or intermediary, to purchase and hold title to the replacement property. At a later date in a separate transaction, the relinquished property is transferred to the buyer and the taxpayer receives the replacement property.
The taxpayer typically provides a loan to the accommodator to fund the down payment on the replacement property. The property is usually financed with an assumable mortgage. When the taxpayer receives the replacement property, he assumes the mortgage.
There are three types of reverse exchanges:
* Type 1: "Reverse regs." exchange.
* Type 2: "Biggs"(9) reverse exchange.
* Type 3: "Simple" reverse exchange.
The first two types rely on an accommodator or intermediary who is hired to complete the exchange. The first transaction under these two approaches is the same. It is the separation in time between the first and second transaction that creates the deferred exchange.
The transactions for the "reverse regs." exchange (Type 1) are:
* First transaction: The accommodator acquires the replacement property from the seller. The accommodator holds title to the replacement property while the taxpayer seeks a buyer for his relinquished property.
* Second transaction: At a later date, after identifying the buyer, the accommodator exchanges the replacement property for the taxpayer's relinquished property. The accommodator immediately sells the relinquished property to the buyer.
Using a "Biggs" reverse exchange (Type 2), the second transaction becomes:
* Second transaction: At a later date, the buyer purchases the replacement property from the accommodator. The buyer then exchanges the replacement property for the taxpayer's relinquished property.
A reverse exchange can also be affected without an accommodator. In a "simple" reverse exchange (Type 3), the buyer serves a dual role, facilitating the transactions for the taxpayer and purchasing the relinquished property. A "simple" reverse is the rarest of the three types of reverse exchanges. It will most likely be the result of a simultaneous exchange that has unraveled.
Related Tags: exchange, estate, real, tax, taxes, 1031
Reggie owns and operates http://www.1031tax.us and knows how to to avoid the mental confusion associated with 1031s and savings through deferred exchanges.
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