Reverse 1031 exchanges are a bit more complicated than the simple forward or delayed exchange. They take more planning but represent a viable strategy when you must, for a variety of reasons, purchase the replacement property before the relinquished or old property is sold. Reasons to consider a reverse are: 

• Taxpayer may lose an earnest money deposit or favorable financing rate if it fails to close on the replacement property by a certain date;
  
• Improvements may need to be made on the old property and needs more than 180 calendar days to complete;
  
• The Taxpayer has not found a buyer for the old property.

In a reverse exchange, the new or replacement property is purchased before the sale of the old or relinquished property. The Exchangor cannot hold title to both properties at the same time, so an Exchange Accommodator Titleholder (EAT) is created to take title or park either the old or new property. The EAT is a single member limited liability company created for the purpose of holding the property for the exchange. It is never reused or holds multiple properties. Once the old property sells, the equity is paid back to the Exchangor for any cash contribution to the new property or to pay down the new property debt.

7 Steps to a Reverse Exchange Parking either the Replacement or Relinquished Property

1. Exchangor engages Atlas 1031 Exchange to facilitate the exchange.

2. Exchangor enters into a Real Estate Purchase Agreement for the new or replacement property. Remember to include the 1031 assignment language in the Purchase Agreement.

3. Atlas 1031 prepares multiple exchange agreements for the closing. Exchangor provides financing for the purchase through a primary, bridge or home equity loan.

4. Depending upon which property is parked with the EAT, a warranty deed transfers ownership for the old property from the Exchangor to the EAT. Exchangor is responsible for loan payments, insurance, taxes and operating expenses. All rent flows to the Exchangor if applicable.

5. If the Exchangor wishes to identify additional properties to sell, the 45 day rule applies and alternate relinquished properties may be identified.

6. Exchangor enters into a Real Estate Sales Agreement for the old or relinquished property. Remember to include the 1031 assignment language in the Sales Agreement.

7. At the closing, traditional closing and exchange agreements are signed. If the old property is parked with the EAT, the EAT signs as the Seller. If the new property is parked with the EAT, the EAT conveys title to the Exchangor. Proceeds from the sale are returned to the benefit of the Exchangor.

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