1031 MN

How Can I “Buy” A Replacement Property before Mine Is Sold?

Sometimes, the perfect investment property comes along as though it was fate. The problem is that the property you are trying to sell has not yet sold and you wanted to take advantage of the 1031 exchange. The 1031 exchange allows many wonderful benefits, including a deferment on capital gains owed. But the standard 1031 takes place once the first property of yours is sold and then you purchase the replacement property.

For those who find the perfect investment replacement property, they want to act fast. After all, if it truly is a great deal, it may not be there once your property finally sells. So what do you do? You look into the 1031 reverse exchange. This is slightly more complicated than the traditional section 1031 exchange but it can still be accomplished.

Basically, you are allowed to purchase the new replacement property when the property you are selling is close to closing. You are then allowed to use the new property you own as the replacement property for the tax benefits. This may seem simple enough but there are in fact a few different versions of the 1031 reverse exchange. You will want to make sure that you are reviewing all of the different options in detail so that you are making the right decision for you.

There is the safe harbor reverse 1031 exchange, which is where the qualified intermediary controls the replacement investment property until the sale of the first property is completed. Within forty five days of taking on the new property, the investor must identify which property is being sold for the exchange. Then there is only one hundred and eighty days to close on the property being sold and for the entire transaction to be completed.

The traditional 1031 reverse exchange looks very much like the safe harbor exchange with the exception that the exchange is not able to be completed within the strict timelines. This type of reverse exchange requires much more documentation and paper work in order to make sure that there are no problems with the IRS or qualifying for the transaction all together. Even though there is a lot more to it, it is still considered to be a very valuable tool in making sure that you can make the most out of your time, money and investments.

There is also the improvement of construction reverse 1031 exchange. This allows the investor to set a piece of the property that will be built on, in the hands of the qualified intermediary. This is a very complex transaction than the traditional reverse exchange or the safe harbor exchange. You want to make sure that you are ready for any and all risks that come along with such an exchange. If you do not clearly understand all of the timelines and the rules regarding the reverse exchange, you could miss out on a big savings. You would have to pay on taxes now with money that you could have used for reinvestments. The more you invest, the larger your wealth will be.

And then there is the leasehold improvement reverse 1031 exchange, which is typically avoided because it has not yet been officially recognized by the IRS. Most people find that the complexities of this reverse exchange and the risk involved is purely not worth it. If you are looking into a reverse exchange, you want to stick with the safe harbor exchange or the traditional exchange.

Either way you look at it, you are going to deal with more documentation and guidelines than if you were doing a standard exchange. If the right property comes along though, you may feel as though you really have no other choice. You have to make sure that you are gaining the properties that are going to do the most for you later down the line. If this means that you are going to have to work within the rules and guidelines of the 1031 reverse exchange, then so be it. Just make sure that you completely understand the timelines and the restrictions. You might want to consider hiring a real estate attorney or using a service that can help you by walking you through the process.

If you want to make sure that you have all of the correct information, you might also want to research the exact definitions, rules and guidelines for the 1031 reverse exchange for yourself through the IRS website. The IRS website will have all of the information you need in order to understand, begin and complete a 1031 reverse exchange. The best thing to do is to make sure that you begin to learn all of the ins and outs of the reverse exchange now, before you have to make snap decisions. This way, you will have all of the knowledge needed to make the most informed decision possible.