Reverse 1031 Exchange
A reverse 1031 exchange represents a tax deferment strategy when for a variety of reasons, the replacement property must be purchased before the relinquished or old property is sold. It is more complex than a forward 1031 exchange and requires careful planning.
Reasons for a Reverse 1031 Exchange
- Exchangor 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 new property
- Exchangor has not found a buyer for their old property yet wants to acquire the new property.
Exchange Accommodator Titleholder
In a reverse 1031 exchange, 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 (smllc) created for the purpose of holding the property for the duration of the 1031 reverse exchange. The smllc is never reused or simultaneously holds property for another exchange. Once the old property sells, the equity is returned to the Exchangor for the cash contribution to the new property or to pay down the new property debt. EATs are also used while the new property receives improvements.
6 Steps to a Reverse 1031 Exchange
1. Exchangor engages Atlas 1031 Exchange to create an Exchange Accommodator Titleholder (EAT) once it is determined that a reverse exchange makes sense to park or take title to either the new or the old property.
If the decision is to park the old property with the EAT, then a warranty deed is prepared by the escrow company transferring ownership of the old property from the Exchangor to the EAT. The deed is recorded prior to the replacement property recording. While the old property is parked, the Exchangor is responsible for loan payments, insurance, taxes and operating expenses through a triple net lease agreement. All rent flows to the Exchangor and mortgage payments to lender as normal.
If the EAT takes title to the new property and a loan is required to purchase, the EAT will sign a non recourse note with the lender. Planning is key so the lender is notified prior to the loan approval process.2. Exchangor enters into a Purchase and Sales Agreement (PSA) for the replacement property with the Seller. Included in the PSA is the 1031 assignment language.
3. Atlas 1031 prepares multiple 1031 exchange agreements including the Qualified Exchange Accommodation Agreement, Promissory Note, Pledge of Membership Interest and Lease for the first leg closing. Exchangor secures financing if needed for the purchase through a primary, bridge or equity loan.
4. If the old property is parked, no identification is needed of the replacement property. If the new property is parked, then the old property is identified as the property to be sold.5. Exchangor enters into a PSA with the Buyer of the old or relinquished property including the 1031 assignment language.
6. At the closings, traditional closing and exchange agreements are signed. If the old property is parked with the EAT, the EAT signs as the Seller, while the taxpayer signs the settlement statement under Read and Approved. Proceeds from the old property sale are reimbursed to the Exchangor or wired to the replacement property lender to pay down the note. If the new property is parked with the EAT, the EAT signs as the Buyer while the Exchangor signs under Read and Approved. Once the old property sells, the EAT conveys the replacement property title to the Exchangor no later than the 185th post the first leg closing.
Atlas' Certified Exchange Specialist® will create 1031 exchange documents in accordance with the 1031 Internal Revenue Code and provide steps to defer your capital gain and recaptured depreciation taxes.
What You Get
- Certified Exchange Specialist® to discuss and accommodate your reverse 1031 exchange.
- Engagement letter itemizing Qualified Intermediary fee and reverse 1031 exchange steps.
- Recommendation which property to park with EAT.
- Consideration whether to convey parked property by assuming EAT or deed.
- Letters identifying 45th and 180th calendar days including property identification instructions.
- Follow ups prior to 45th and 180th calendar day threshholds.
- At exchange completion, a summary file of primary 1031 exchange documents for you and your accountant.