Many investors are drawn to a reverse 1031 Exchange because it allows them to secure a replacement property before selling their existing one. But buying first also comes with additional requirements that investors do not encounter in a traditional delayed Exchange.
Tom Moore, President of Equity Advantage, says this is where many investors get caught off guard.
Why a Reverse 1031 Exchange Costs More Upfront
In a traditional delayed 1031 Exchange, investors sell a property and then use those proceeds to acquire the replacement property. With a reverse 1031 Exchange, the investor buys the replacement property first, before receiving any funds from the sale of their current property.
That raises an obvious question: where is the money for the replacement property supposed to come from?
This is what Tom often refers to as the “cash problem.” Since there are no sale proceeds available yet, investors need to have funds available from another source to complete the purchase.
The Role of an Exchange Accommodation Titleholder (EAT)
Since reverse Exchanges offer a lot of flexibility, many investors assume they can simply buy their replacement property now and sell their existing property later. But that’s not how a reverse 1031 Exchange works.
Instead, a separate entity temporarily takes title to the replacement property while the investor works toward selling the relinquished property. This entity is known as an Exchange Accommodation Titleholder, or EAT.
This is where a company like Equity Advantage steps in. As part of the reverse 1031 Exchange process, it creates the EAT as a single-member LLC that it wholly owns. The EAT then steps in to hold the replacement property while the investor works toward selling the relinquished property.
Reverse 1031 Exchanges Require More Preparation
Investors often pursue a reverse 1031 Exchange because they have found a replacement property they might lose if they cannot sell their current property fast enough.
The ability to buy first can solve that problem, but it also means more planning has to happen upfront than a typical Exchange. Investors need a plan for where the funds will come from and how the Exchange will be structured before they can actually move forward with purchasing their replacement property.
What Buying First Means for Your Exchange
Reverse Exchanges are a great tool for investors who want the flexibility to buy the right replacement property when it comes along, but it is not a perfect fit for all investors. It requires more funds to execute than a traditional exchange and more careful planning needed up front. However, in the right situation and with the proper preparations it can help investors make the right choice for their investment goals.
If you are thinking about a reverse 1031 Exchange, contact Equity Advantage today to make sure you set your Exchange up for success.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
FAQs About Reverse 1031 Exchanges
What is a reverse 1031 Exchange?
A reverse 1031 Exchange allows investors to acquire a replacement property before selling their existing property. Unlike a traditional delayed Exchange, the purchase happens first, which also means additional funding and planning are required upfront.
Why does a reverse 1031 Exchange cost more upfront?
A reverse 1031 Exchange costs more upfront because investors purchase the replacement property before selling their existing property. Since there are no sale proceeds available yet, investors need to have funds available from another source to complete the purchase.
What is an Exchange Accommodation Titleholder (EAT)?
An Exchange Accommodation Titleholder, or EAT, is a separate entity that temporarily takes title to the replacement property while the investor works toward selling the relinquished property. In a reverse 1031 Exchange, the EAT is used to hold the replacement property during the transaction.
