Is this a legal use of the 1031?

[JD Martin]

@Dave Foster because I know he'll have some insight, but I'm curious to see what others think as well.

On another forum (not BP), someone posted that they were able to do a 1031 in reverse by:

1. Purchasing a property that would qualify under normal circumstances;

2. Putting the property into the name of an LLC (with themselves as the officers);

3. Selling the original property and then 'purchasing' the new property from the LLC.

I heard that and it sounds like a slick strategy but also sounds like it could be illegal, i.e. a clever but against-the-law way of sidestepping the IRS rules & laws on 1031s. They said they used it because they weren't sure they could identify another suitable property in 45 days based on their local market. 

So what say you? 

[Dave Foster]

@JD Martin, Thanks for the shout out!  It is a form of exchange called a reverse exchange.  There can be several variations on this.  And you are right - It's a very slick strategy.  But can be costly and is complicated.  It is based on the legal premise that you cannot take title to your new property until you have sold your old property.  A reverse doesn't change that.  But in a reverse the QI for the 1031 forms an entity called the "Exchange Accommodating Title Holder".  And this entity takes title to the new property before you do and holds it for up to180 days.  All based on the safe harbor of IRS Revenue Procedure 2000-37.

Most common applications are

1. You find the perfect new property and have to purchase it but your old property will not have sold yet. (A regular reverse exchange)

2. The new property you want is worth less than the property you are selling (or have sold) and needs improvements that will bring it up to the level of your reinvestment requirements (a reverse improvement exchange).

3. The new property you want doesn't exist yet.  You found the lot and want to build a structure on it (a reverse construction exchange).

Timing is a factor here.  So is cost (usually an additional $7000 - $15,000 is not uncommon).  And financing if any is involved is going to be a portfolio product or private lending.  But when our clients consider that during the time we, as the EAT hold the new property they get all control, benefit and income from both the old and new property.  It is many times well worth it.  In addition to easing some of the angst of the 45 day identification period.