Reverse 1031 Exchanges

1031 EXCHANGE HANDBOOK ...

EXCHANGES OF A MORE ADVANCED NATURE

Reverse Exchanges

What if you want to buy your new property before selling your old property?  If you buy the new property in your name and subsequently sell the old property, the transaction will not qualify as a 1031 Exchange.  This situation calls for a reverse exchange.  In the typical reverse exchange, the EA forms an Exchange Accommodation Titleholder (EAT) who buys and holds (parks) the new property for you until you have closed the sale of your old property.  You provide the EAT with the funds necessary to purchase the property.  You are also responsible for all closing costs on the purchase, but you do not actually take title to the new property, the EAT does.  Your loan to the EAT is documented by a promissory note from the EAT to you, a mortgage or deed of trust tying the money to the property.  When your old property sells, the exchange proceeds go to your EA.  The EAT then transfers the property to you and you use your exchange proceeds to buy the new property from the EAT.  This completes your 1031 Reverse Exchange.  When undertaking a reverse exchange, be careful in the selection of your lender.  FHA and Fannie Mae type lenders can be a problem, because they are being asked to lend money to you, but you will not appear on a title for a short period of time.  You should seek out a bank or other portfolio lender who will make a bridge loan to you which can be converted to a long-term financing when the EAT ultimately transfers the property.