Reverse 1031 Exchange – The buy now, replace later strategy

(c) Copyright 2006 by Mark Hayes

Did you know that you can buy a property now, and find a property to exchange it for later without incurring taxes? You probably know that a 1031 exchange allows you to defer your capital gains tax when you sell a property and later acquire another. What if you can acquire a new property first, then do the exchange later... Wouldn’t that benefit you?

So what exactly is a Reverse 1031 exchange?

A Reverse 1031 exchange is just what it sounds like, an exchange that you are allowed to buy the replacement first and sell your property for exchange later! Before we go to far, however, let’s examine how a reverse 1031 exchange works. The exchange begins with a real estate exchanger finding a replacement property and buying it before he or she sells the property he or she wants to exchange. The process and rules pertaining reverse 1031 exchanges are complex and many people missed out on the opportunities to save and make a lot of money because of it. (For more information about 1031 exchanges, see our website details below.)

The most obvious time to do a reverse 1031 exchange is when there is some urgency to buy a property now but no urgency to sell.

For example, the real estate property you want to buy is very hot so if you wait, the chances are that the property will go to someone else. If you cannot close on the sale of your property soon enough, you may need to do a reverse 1031 exchange to allow you to buy the replacement property first and sell your existing property later. Bear in mind that you need to plan in advance to have the replacement property qualified under the reverse 1031 exchange. Don’t go to closing then try to qualify it!

Real estate investors often find great deals even when they don’t plan for them. If you find a great deal such as a distressed property or an REO (real estate owned property), you may want to jump on it as soon as possible. At the time, you may not even know what properties of yours you want to trade with that new deal but you know that you will want to exchange one. In this case, a reverse 1031 exchange is perfect for you. If you are using a realtor, make sure your realtor knows that your are buying for a reverse 1031 exchange.

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