By Phil Atwan
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With changes in the real estate market I've been getting a lot more calls about how to structure a Reverse Exchange. In general, I usually advise my clients to avoid a Reverse Exchange if possible because they are more expensive and more complex. With a Reverse 1031 Exchange the replacement property is purchased first. The exchangor then has 180 days to sell the ‘relinquished’ property. Provided the relinquished property sells within 180 days, the sale is tax deferred.
However, Reverse Exchanges can be difficult to pull off for the following reasons:
- The Reverse Exchange requires the 1031 Exchange Company to take title to the replacement property.
- Most lenders will not loan on a Reverse Exchange, so the purchase will need to be made with either a) all cash b) seller financing or c) a hard money lender with flexible terms.
- The fee is a bit higher to do a Reverse Exchange (call for an exact quote).
- There will likely be additional escrow and title fees involved (costs vary depending on the title company).
- There will be duplicate transfer taxes involved in a Reverse Exchange.
To avoid a Reverse Exchange, you may want to consider:
- Make an offer to buy replacement property that is contingent upon selling yours.
- Make an offer to buy with a long escrow (60 or 90 days) to buy yourself some time to get your sold.
- If #1 or #2 won’t work, bribe them with some cash. Either:
- Just offer more money for a flexible closing
- Offer a series of non-refundable deposits at specific time periods (i.e. a 90 day escrow with deposits at day 30 and 60)
I like happy clients, and in general, the best way to keep clients happy is to avoid a Reverse Exchange - but when that can't be done, we'll suffer thru the process with you and work our best to make lemonade out of lemons.
My goal is to be a resource for you and your clients on all things 1031 Exchange. Save my contact information - you may not need it today, but you’ll be glad to have it when an issue like this comes up.
