Is some circumstances, you may not meet the requirements for a typical 1031 exchange. Depending on the situation, you may be able to perform a reverse 1031 exchange transaction to defer capital gains taxation on your investments. Read on to discover how it works.
You’ve decided you want to do a 1031 exchange to defer capital gains on the sale of your property, but your replacement property is closing before you can sell your relinquished property. You can’t buy the new property in your name or else it won’t qualify to be exchanged with your current property. What are you going to do? You can still do the 1031 exchange, but for cases like this it would be considered a reverse 1031 exchange. A reverse 1031 exchange transaction allows you to purchase the new investment property first, and then sell your existing investment.
In order to do this a Qualified Intermediary (QI) takes title of the property that the individual wishes to purchase in an LLC that is formed solely for this exchange (also known as an Exchange Accommodation Titleholder) until the existing investment property is sold. The reverse exchange must be completed within 180 days. The 180 day clock starts on the date the QI purchases the replacement property for the taxpayer. Midland 1031 would then “park” the property in the LLC until you close on the sale of your current property. Within the 45 days of purchasing the parked property, an identification form must be completed identifying the relinquished property or properties that are to be sold. Once you close on your sale we would assign full membership in the LLC with the parked property over to you, making you the owner of the property.
How does a reverse 1031 exchange transaction work?
- You go under contract for the property you wish to purchase. (Make sure that the contract is assignable because title will be going in the LLC)
- You would then forward a copy of the contract for your purchase along with the name and contact information of the title company or attorney handling the closing to us. If there is a mortgage on the property, we will need to know the lender’s contact details and you will need to notify them immediately to let them know you’re doing a 1031 exchange. The loan documents will need to be in the name of the LLC that is established for the exchange.
- We would then set up the LLC that will be taking title to the property and provide closing instructions to the title company or attorney handling the closing.
- You must then identify all potential sales for the exchange to your QI within the first 45 days of the 180 day period.
- Once you are under contract to sell your original property, Midland 1031 draws up the reverse 1031 exchange transaction documents pertaining to your sale, and we forward closing instructions to the title company handling the closing.
- You would proceed with the closing and the title company would wire the proceeds directly to us, which we would then use to pay down any loans on your new property. If there is no financing on the new property, the proceeds would be disbursed to you.
- Once you close on your sale, we would assign full membership in the LLC over to you, and you will now be the owner of the new property.
Before you do any type of 1031 exchange, you must notify your qualified intermediary before you close on any properties. One of the Certified Exchange Specialists (CES®) at Midland 1031 will guide you through every step of the exchange to ensure that the exchange is done properly.
For questions or to start your exchange call 239-333-1031 or visit www.MidlandTrust.com.