Tax-deferred exchange transactions can be a great way to help you manage your wealth over time. A reverse 1031 exchange is a unique type of tax-deferred exchange that applies to real estate purchases.
A reverse exchange allows you to hold onto any property that you want to sell, while still purchasing new properties in the present. Investors that utilize tax deferred exchanges are able to better take advantage of the fluctuations that occur naturally within the real estate market.
Use these three tips to ensure your reverse 1031 exchange goes as smoothly as possible.
1. Work With a Reputable Investment Firm
Establishing a reverse 1031 exchange can be challenging. You will need to partner with a reliable investment firm before you think about purchasing a property to add to the exchange.
Your investment firm will play a major role in helping you meet the criteria required for a reverse 1031 exchange. The firm can create a single-person LLC that will act as the exchange accommodation titleholder (EAT).
Since you can't personally hold the title to all properties involved in a reverse 1031 exchange, you will need to park one of the properties with an EAT. Although the title of the property remains with the LLC, an investment firm will establish a property management agreement that allows you to retain full access to the property at all times.
2. Establish Funding and Negotiate Your Purchase
If you plan to finance the purchase of a new property with personal funds, your investment firm will be able to help you do so without violating any terms of a reverse 1031 exchange.
If you need to work with a lender to get a loan to complete your purchase, be sure that you partner with a lender that is familiar with reverse 1031 exchanges to avoid any costly delays.
Once you have the money required to make a purchase, you can begin to negotiate the terms of the sale. Be sure that your purchase contract contains a 1031 exchange cooperation clause so that the seller will be legally bound to comply with the requirements of a reverse 1031 exchange when completing your transaction.
3. Complete Your Purchase
Completing the purchase of a property that will be part of a reverse 1031 exchange requires unique funding arrangements.
Since the titleholder must hold the title to the parked property, all loans must be in the EAT's name. You will need to provide the EAT with cash to cover any down payment or earnest money.
A trust deed is then prepared between you and the EAT to ensure you are able to regain possession of the property title once your 1031 exchange is complete.