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Savings in Forward and Reverse

Expand your real estate investment horizons with the Reverse 1031 tax exchange

By Sallie Paris

For experienced investors, 1031 tax exchanges have long been a favored vehicle for deferring capital gains taxes while upgrading and expanding their real estate investment portfolio. In their most common form, however, such exchanges have become more difficult to reliably execute. Fortunately, a lesser-known section of the US tax code allows investors to take advantage of the tax benefits of the popular 1031 exchange without missing out on a hot listing that may not last.

Prior to the extremely low inventory in our current market, investors were accustomed to the security of knowing they could shop for an upgraded beach home at a relatively relaxed pace, assured that market inventory would generally be sufficient to allow them their choice of replacement homes. However, in today’s climate it is entirely realistic that a replacement property simply may not be available, or that the seller of that property has multiple offers and is therefore unwilling to entertain a contingency that the buyers must sell their current property first.  

What do the two types have in common?

Whether forward or reverse, 1031 exchanges must meet strict requirements set by the IRS. The properties involved must be for investment purposes, specific deadlines must be met, and exchangors must retain the services of a qualified intermediary.  

What’s the difference?

The fundamental difference between the two types of exchanges lies in the order of transactions. With the more-common forward exchange, the exchangor sells Property A (the “relinquished property”) and proceeds from that sale are held by the qualified intermediary until they are used to buy Property B (the “replacement property”). Typical costs in the 30A market are 1,500 dollars or less for this type of exchange.

With a reverse exchange, the replacement property is purchased before the relinquished property is sold; closing, title, and legal procedures are more complex in this scenario, and therefore the associated costs are greater, typically up to $7,500. Nevertheless, the enormous potential tax savings far outweigh the additional cost.

What deadlines are important?

The two deadlines to bear in mind are 45 days and 180 days. Starting with the closing date of the replacement property, exchangors have 45 calendar days to identify what they are going to sell as the relinquished property, and they have a total of 180 calendar days to close out the reverse 1031 exchange by completing the sale of the identified relinquished property. Otherwise, the 1031 exchange is considered null and capital gains taxes are calculated as usual.

As with any advanced investment strategy, it is imperative to work with a team of experienced professionals. Your Coastal Luxury real estate expert will have the experience, contacts, and expertise to allow you to harness the full potential of this powerful tool.

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