What is a Reverse 1031 Exchange and What Should I Look Out For?
A reverse 1031 exchange is a type of like-kind exchange in which the replacement property is acquired before the relinquished property is sold. This is in contrast to a traditional 1031 exchange, in which the relinquished property is sold before the replacement property is acquired.
There are a few things to look out for when considering a reverse 1031 exchange. One is that the IRS has specific rules for how these exchanges must be structured in order to qualify for tax-deferral treatment. For example, the replacement property must be held in an exchange accommodation titleholder (EAT) trust or a qualified exchange accommodation arrangement (QEAA) until the relinquished property is sold.
Another thing to consider is that, because the replacement property is acquired before the relinquished property is sold, you will need to come up with the funds to purchase the replacement property on your own. This may require you to use other sources of financing or to sell other assets in order to come up with the necessary funds.
It's important to be aware that reverse 1031 exchanges can be more complex and may involve more costs and fees than traditional 1031 exchanges. It may be advisable to seek the advice of a qualified intermediary, tax professional or attorney to ensure that the exchange is completed properly.