When doing a 1031 exchange

Question

Can you purchase another rental property first then sell the other rental property later, but in the same year?  Or does it have to be sell one then buy one?

Account Closed · Answer

Mandeep,

They call it Reverse 1031 Exchange. I'm having a meeting with a 1031 Exchange person at First American Title company this Friday about this topic. Lay all of your questions out there, and I will try to get them answered for you. Otherwise, @Bill Exeter , the 1031 Exchange expert on BP, can also answer any questions you may have.

Mandeep Randhawa · Answer

Thanks guys. Appreciate the info.  I guess when Jan 1 rolls around I'll start looking for a rental(future home) and sell my current rental when the lease is up in May.

Bill Exeter · Answer

Hi Mandeep,

Yes, the Reverse 1031 Exchange allows you to buy your replacement property first and then sell your relinquished property later.  Reverse 1031 Exchanges are more complicated because the Qualified Intermediary must acquire and hold or "park" legal title to either your replacement property or your relinquished property depending on which structure works best for you.

However, they work great in markets like we have today because you can take all the time you want to find suitable replacement properties, acquire them via the Qualified Intermediary, and then focus on selling your existing relinquished property.  The Reverse 1031 Exchange takes most of the risk out of the process in markets like this.

You also have the same deadlines.  You have exactly 45 calendar days from the date that your replacement property is "parked" by the Qualified Intermediary to identify what you are selling, which most investors already know so it is just a formality, and you have exactly 180 calendar days (including the original 45 days) to complete and close on the sale of your relinquished property.

The other benefit of the Reverse 1031 Exchange is that in the unlikely event that you are unable to sell your existing property within the 180 days in today's market, you have a failed Reverse 1031 Exchange, but since nothing has been sold you have no taxable gain to worry about.

Personally, I always use the Reverse 1031 Exchange so that I do not have to stress out over the 45 day identification process in a Forward 1031 Exchange.