Reverse 1031 Exchange On Existing Property?

Question

Could I do a reverse 1031 exchange for a property that I recently purchased with cash?  it would be the property that I first aquire for the reverse 1031.

Below are more details:

I purchased a property last month with a loan.  I'm considering paying-off the property and having another entity (reverse 1031 organization) own the property as part of a reverse 1031 exchange.  Then, when the property I'm selling- sells, I can complete the reverse 1031 exchange.

Rick T. · Answer

thx

Dave Foster · Answer

@Rick T., Arms length to avoid a step transaction would involve retail sales which would cause a recognition of gain anyway.  That's the problem with the reverse at this point.  And even with that I'm not sure you'd have a rock solid case with a potential for a step transaction.

Yah, I know that 45 days can be a killer.  Unfortunately there's no extensions or exceptions.  Find a realtor with a pocket listing.  Or take a look at different geography.  Or look into a passive fractional option that still qualifies for 1031 treatment.  These typically move a little more slowly.

Rick T. · Answer

BTW, this 45 day identification rule is killing me as their is not much inventory for my target property type/area.

Any ideas to get around it...

Rick T. · Answer

Thanks for your reply.  You mentioned that, "unless handled at arms length for retail would probably result in a step transaction".

could you explain what you mean by this?  it is for a retail property that was handled at arms length.

Dave Foster · Answer

@Rick T., You've already taken title so you can't exchange into it now.  In a reverse exchange you do locate your new property first.  But you don't take title to it.  The QI takes title in a special entity called the Exchange Accommodating Title Holder.  And then when you complete the sale of your old property you "purchase" the new property from the EAT.  But the entire time before you did not own the new property even though you controlled it.  Since you've already taken title it won't work.

An attempt to create mid line entities right now unless handled at arms length for retail would probably result in a step transaction.  And if done the right way there will be taxable events somewhere anyway.