1031 Exchange rules when buying first

4 Replies

@Rob Pecha nailed it. 

If you purchase your "Replacement Property" first- then sell your property (relinquished property) that is considered a Reverse Exchange. If you sell your Relinquished Property first- then buy your Replacement Property, it is considered a forward exchange. 

The Reverse comes with more costs since the QI/and Exchange Accommodator will hold title to one of the properties. But it can certainly be done, and we do them all the time. 

Happy to help. 

@Jesus Hurtado , The statutory order of the 1031 is always that the sale of your old property must happen before you close the purchase of your new property.

The "reverse exchange" that everyone is rightfully referring to, does not change that order.  It is really an additional and separate process where your qualified intermediary forms a holding entity called the "exchange accommodating title holder" and takes title to the new property and holds it for you until your old property sells.

More complex, More expensive, and the financing of the new property can be tricky.  But if you're sheltering more than $30 - $40K of gain it might make sense.  And it definitely alleviates some of the angst of being in a sellers market and having to find a replacement property in a relatively shot amount of time.  

One thing to consider would be simply getting a contract for the purchase with as extended a closing date as possible.  If you can get your old property closed before you have to take title then just do a straight exchange.  If there's no way you can compete your sale by that time then set up a reverse at that point.

Hi @Jesus, as mention by others, the same rules apply to a reverse exchange as to a regular 1031 exchange. So yes, you may buy the replacement property before selling your property but the costs associated with an exchange might be increased depending on the exchange company.