What is a 1031 Exchange?

The 1031 Exchange is a tax-deferred strategy (refering to section 1031 of the IRS tax code) for real estate investors which allows you to avoid income taxes on the sale of a property when the intention is to reinvest the proceeds in a similar or like-kind property. Also called the Tax-Deferred Exchange, it is a long-term strategy with multiple restrictions and benefits. As you’ll see, it can be quite complicated and I recommend that you seek advice from both your Realtor© and tax professional and/or attorney before attempting an exchange. However, the benefits are well worth the effort and it is never too early to begin thinking of tax strategies for your next investment.

In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property. But in an exchange, the tax on the transaction is deferred until some time in the future, usually when the newly acquired property is sold.

In an exchange, a property owner simply disposes of one property and acquires another property. The transaction must be structured in such a way that it is in fact an exchange of one property for another, rather than the taxable sale of one property and the purchase of another.

Today, a sale and a reinvestment in a replacement property are converted into an exchange by means of an exchange agreement and the services of a qualified intermediary - a fourth party who helps to ensure that the exchange is structured properly. The IRS's regulations make exchanging easy, inexpensive and safe.

What is a Reverse 1031 Exchange?

1031 Exchanges are specifically structured transaction that join together the sale of an old property and the subsequent purchasse of a new property for the purpose of deferring taxes. As part of the IRS's 1031 regulations, you are required to utilize a Qualified Intermediary (QI) to facilitate the exchange.

Unlike a typical 1031 exchange, you may need to buy your new property before you have sold the old one. Unfortunately, IRS regulations don't allow you to hold title to the old and new properties at the same time.

The good news is, a reverse exchange allows you to exchange property in reverse order - and yet still enjoy the tax benefits. In a reverse exchange, QI must arrange to buy the new property for you and hold it for a period of time.

How can a Reverse 1031 Exchange Help Me?

There are several reasons you may want to buy new property before you have sold your old property, for example:

*Market conditions are making it difficult to find a buyer for your sale property.

*You face the possibility of losing an earnest money deposit, or favorable financing rates.

*You need to construct improvements or buildings on land you are purchasing.

In these circumstances, a normal 1031 exchange may not be possible. However, a reverse exchange may allow you to preserve the flexibility, leverage and buying power of tax deferral.

 For More Detailed Info. on 1031 Tax Deferred Exchanges visit the

Field Guide to 1031 Exchanges at Realtor.org  CLICK HERE