What Is A Reverse 1031 Exchange?

As the name implies, a reverse 1031 exchange is the opposite of a standard 1031 exchange. It occurs when an investor locates and acquires replacement property before he or she sells the relinquished property. This type of exchange is designed to allow investors to take advantage of an excellent investment opportunity even if it comes along before the investor sells an unwanted investment property.

However, as with any type of 1031 exchange, the IRS imposes strict procedures and time requirements on a reverse exchange if the investor wishes to take advantage of “safe harbor” provisions. These are not mandatory, and an investor can always complete a reverse exchange outside these provisions. However, in those circumstances, the transaction has a higher degree of audit risk.

So what are these “safe harbor” provisions put in place by the IRS? They are derived from Revenue Procedure 2000-37, and have everything to do with time.

• Title to the replacement property must be transferred to an exchange accommodation titleholder, typically the Qualified Intermediary when a reverse exchange is anticipated.
• Within 5 days of this property transfer, a written Qualified Exchange Accommodation Agreement (QEAA) must be completed.
• Within 45 days after the transfer of the replacement property to the qualified intermediary, identification of the relinquished property(ies) must be completed. The same rules governing identification of property in a standard exchange apply (Three Property Rule, 200% rule, etc.).
• The reverse exchange must be completed within 180 days of the qualified intermediary taking title.

One important thing to note with a reverse exchange is an additional prohibition put in place by the IRS with Revenue Procedure 2004-51. Any property previously owned by the investor within the prior 180 days is ineligible for safe harbor.

To learn more about 1031 exchanges or our qualified intermediary and replacement property locator services, please visit our website.