People often ask if they can do a 1031 exchange before they sell their current property, and the short answer is “yes.” However, timelines are critical, and a variety of structures are available. Just because the 1031 exchange exists doesn’t mean you should do it. The best solution, when faced with this decision, is to rely on the expert advice of someone who knows. Here, David Moore, with Equity Advantage, provides the answers.
Do reverse exchanges let you start a 1031 exchange before you sell your property?
The answer is yes. Reverse exchanges we’ve been doing since 1991 when we started the company. In 2000, we got guidelines on 2000-37s of revenue procedure that gives us the safe harbors for reverse exchanges.
Unfortunately, the guidelines don’t allow us to do what we would deem a true reverse exchange, and just so we can be all on the same page, we in here would consider a true reverse exchange the opposite of delay.
You just show up with the money required to buy the new property at time of close if that replacement property you would have been able to buy it. Own both properties at the same time, that 45 days from acquisition to ID what’s to be sold, 180 days to get it sold. When it sold, the funds would come back in and take care of that transaction. But, in 2000 when they came out with the safe harbors, they didn’t give that as an option.
They gave us more complicated options. They gave us warehouse transactions, so in today’s world we do reverses in several different structures. A warehouse replacement or a warehouse relinquished, and each of those is driven by financing: how much money is available to put down on new property versus putting it down on the old property. But, really, what we’re looking at is a warehouse transaction where we’re taking ownership for a period of time. The exchange, actually, if you look at it, is a simultaneous exchange. It happens either at time of acquisition or at the time that you relinquish that property.
So, in a nutshell, you could buy a property today and replace a property that has yet to sell – could have, as I said, up to 180 days to get rid of that property. We also do something called blended transactions where if you’re giving up, let’s say, portfolio properties and going into a single replacement, we could do a portion of those relinquished properties – anything that sold before acquisition. It could be like a delay. The properties that have yet to sell would come into the transaction via reverse exchange.
So, using that structure we could actually get out almost a full year to get a transaction completed. But, the initial question is, “can a reverse exchange allow you to buy something before you sell?” And the answer is, “definitely yes.” We’re doing a lot of them in today’s market. I would probably discourage people from looking at a reverse as the first option. Use it as a fall back. And what I mean by that is go ahead, make the offer, ask for whatever time you feel you can. If you can get it done as a delayed exchange, great. If it has to be a reverse, we can always use that as a fall back.
Are there any other 1031 exchange options that I should consider?
Well, like I said, bottom line… Ask for whatever time you can. Avoid the reverse if you can. If you need to do it, it’s there. It’s going to cost more money. There, possibly, are some other costs involved. Banking: if there’s a loan involved, it’s definitely going to be something you need to consider, too. Once again, just because you can do that transaction, doesn’t mean you should.
They work great when you want to use them. You just got to follow the rules. Please give us a call with any questions you’ve got on this process. We’d be happy to look at your transaction.
Navigating 1031 exchange options takes a professional, and you can count on the whole team at Equity Advantage to help. Your investments are just too important not to have an expert on you team. Give the folks at Equity Advantage a call, 503-635-1031, to get started!