What is a 1031 Reverse Exchange?

The majority of 1031 exchange transactions are structured as forward 1031 exchanges (also referred to as regular or delayed 1031 exchanges). The real estate investor sells his or her relinquished properties first and then subsequently buys one or more replacement properties in a forward 1031 exchange.

Forward 1031 exchanges have specific time requirements that real estate investors must abide by. These time requirements can be challenging even for the more experienced real estate investor and are one of the reasons that real estate investors have started using reverse exchanges more frequently when structuring 1031 exchange transactions.

It is important that the real estate investor set-up the reverse exchange with a 1031 exchange Qualified Intermediary and Exchange Accommodation Titleholder before any of the relinquished or replacement properties close.

Buy First; Sell Later
Real estate investors can use a reverse exchange to acquire one or more replacement properties first and then subsequently sell the relinquished properties later within the 180 day exchange period. The reverse exchange allows the investor to take all the time they need to find the right property for them and then acquire it first. The reverse exchange deadlines do not start to run until the property has been acquired and parked by the Exchange Accommodation Titleholder.

Reverse Exchange Deadlines
The real estate investor then has exactly 45 days to identify what they intent to sell (relinquished property) and match with the replacement property acquisition once the replacement property has been acquired and parked with the Exchange Accommodation Titleholder. The relinquished property is generally already known so the identification is just a formality. The real estate investor then has an additional 135 days, for a total of 180 days, to complete the sale of the relinquished property in order to complete the reverse exchange.

Exchange Accommodation Titleholder
The real estate investor must retain an Exchange Accommodation Titleholder, or EAT, which is generally a sister company to the 1031 exchange Qualified Intermediary. The EAT’s sold responsibility is to acquire and park or hold title to the replacement property during the reverse exchange process.

The entire transaction can be completed within the 180 day period established by the IRS’s safe harbor rules (Rev Proc 2000-37).

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