reverse exchange

1031 Exchange Explained - Top 25 FAQ's Answered by Subject Matter Experts

Anonymous — Tue, 15 Jun 2021 18:36:00 +0000

1031 Exchange Explained - Top 25 FAQ's Answered by Subject Matter Experts

Anonymous (not verified) Tue, 06/15/2021 - 18:36

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1031 Exchange Explained - Top 25 FAQ's Answered by Subject Matter Experts

Top 25 1031 Exchange FAQs

1. Can some of the members of an LLC do their own exchange or cash out at the time of the sale of the property?

The IRS Code does not allow members/partners to do his or her own exchange, only the entity can do so. Given enough preplanning, there is a technique referred to as a “drop & swap” whereby certain members/partners can drop their interest from the entity and enter the exchange individually and not at a member/partner.

2. When doing an exchange, is it sufficient to get tax deferral if the gain is rolled over?

No, to fully shelter the gain, the sale price of the relinquished property, net of closing costs must be reinvested. Another way to look at this is that the net amount going into the exchange account must be reinvested and there must be equal or greater mortgage debt on the new property compared to what was paid off upon closing of the old property.

3. The Qualified Intermediary wants how much just to hold my money?!

Under the regulations there are quite a few options to deal with holding the money from the sale. Some do not require putting the money with the QI although that is generally the easiest and most convenient. The real reason a taxpayer must use a QI is, through the paperwork provided, use of a QI converts the transaction of the sale of a property and the later purchase of a new property to an exchange of the one for the other.

4. Does it jeopardize my exchange if the other party to the sale or purchase contracts chooses not to sign receipt of the notice of assignment?

No, there is no requirement under the regulations that the counterparty needs to sign receipt of the notice of assignment. Rather the only requirement is that the other party needs to receive the notice of the assignment. Receipt for it may be a common courtesy but it does not harm the exchange if the party prefers not to sign for that notice.

5. Can I pay my replacement property loan application and related fees out of my exchange account?

No, an exchange is a like kind exchange of real estate for other real estate. Incidental costs such as paying loan related fees do not constitute the direct payment for like kind real estate.

6. Can I pay my attorney fees out of the exchange account?

To pay such fees out of an exchange account, the fee needs to meet two pronged criteria. First, the fee must relate only to legal services pertaining to the sale and/or purchase. The second one is that the type of payment must be one that is typically found on a closing statement in the locale where the property transaction takes place.

7. Are there any special rules regarding notice of assignment when there are others selling with me or buying with me?

Yes, the Regulations require that all parties to the contract must receive notice of the assignment by the taxpayer of his/her interest. So should there be other parties selling or buying with the taxpayer, those parties must get the notice as well as the party on the opposite side.

8. Under the safe harbor, is the Qualified Intermediary the one to whom I must give the 45-day notice of identification to?

No, the Regulations provide that any party to the exchange can be the necessary recipient of the notice. So, for example if the contract with the seller of the new property contains a reference in the contract stating that this is the replacement property for the buyer’s exchange, that would be sufficient.

9. If I am involved in a related-party transaction, is it cured if both parties hold onto the property for at least two years?

No, this is a misconception. The two-year curative provision only applies if the related parties are exchanging directly with one another. This is seldom the case. In a situation where the taxpayer sells the relinquished property to a third party and acquires and holds replacement property for an excess of two years from the related party, that is not sufficient to meet the rule.

10. Is the exchange invalidated under the related-party rules if I sell the relinquished property to a related party?

No, the purpose of adding the related party rules to the Tax Code was to prevent taxpayers from manipulating the tax result by buying replacement property from a related party such as a subsidiary company. That so called tax abuse is not applicable when a party is selling the relinquished property to a related party.

11. Can I buy my replacement property from my relative such as my son-in-law or cousin?

Yes, the related party rules to not necessarily include all relatives. Rather they disallow persons that are descendants or one another. Lineal descendants such as Parent, child, grandparents, siblings are considered related for this purpose, not so for in laws, aunts, uncles, cousins, etc.

12. How do I report a sale of relinquished property in year prior, but exchange proceeds are paid to me in the next tax year?

The default is that the payment of the tax is treated as an installment and payable in the year in which the funds were able to be paid out. Should a particular taxpayer wish to pay it in the first year to take advantage of tax losses in that year or for other reasons that can be done by a special election.

13. In a reverse exchange, since the Accommodator will be in title, does that mean it collects the rent from the property tenants?

No, the Reverse Exchange Rev. Proc. is very taxpayer friendly and relations between the Accommodator and taxpayer do not have to be arm’s length. Typically, the Accommodator will Master Lease the property to the taxpayer enabling the taxpayer to manage the property, collect the rent and pay for expenses.

14. In connection with my exchange, my bank is willing to lend me 80% LTV. Does that work for me for my exchange?

No, this is a common problem. Since for exchange purposes a taxpayer must roll over all the net cash, the amount of the loan should be for the remainder of the purchase price.

15. Can I do an exchange of a franchise where I own the land and the business?

No, effective with the current changes to the Tax Code made beginning with the year 2018, only real estate can be the subject of an exchange. As a result, personal property such as a business or franchise cannot be the subject of exchanges.

16. Can I refinance the relinquished property prior to the exchange or the replacement property after the exchange?

While there is nothing in the Regulations on this question, for technical reasons it is considered bad practice to refinance in anticipation of entering an exchange. By doing so, it changes the amounts on cash and debt that would need to be applied to the replacement property acquisition and it is tantamount to “gaming the system”. Refinancing after an exchange to pull some equity out does not have these issues and is considered proper.

17. Can I, as seller, or my attorney, hold the earnest money prior to the closing of the RQ Property?

Yes, that does not cause any issues since the exchange rules do not come into play until the time the relinquished property is transferred. At that time neither the taxpayer nor his/her agent should be holding onto exchange funds.

18. Does the Qualified Intermediary have to be referenced on the Settlement Statement or sign it?

The primary purpose of a Settlement Statement on a commercial transaction is to let the buyer and seller see how the amount they must pay, or the amount received was calculated. As a legal matter it is not required by any exchange rules. However, in different jurisdictions settlement agents have the practice of refereeing the Qualified Intermediary and/or having it sign the Settlement Statement.

19. Can a 1031 exchange be done where I am the seller or buyer under articles of agreement for deed?

Yes, but there are some challenges. If a taxpayer is selling on an installment basis, to the extent that most of the purchase price is payable beyond the 180-day exchange period, the taxpayer can only get deferral if he/she advances the amount into the replacement property even though it may not be received for a period of years. A buyer can but under an installment contract and the balance that is carried by the seller is treated like any other debt, such as a new loan by a bank lender.

20. Can an exchange be done where all or part of the sale price involves owner financing?

Yes, same answer as above. The seller would have to advance the sum being financed into the replacement property. Later receipt of that principal sum from the buyer would be tax deferred. Interest paid during that period would be taxable.

21. Can credit card bills or other costs be paid out at a closing upon the sale of relinquished property?

Some costs that pertain closely to the sale of the property such as commissions, title insurance fees, closing fees, recording fees, transfer taxes, etc. can come out of the proceeds before the net amount is sent to the Qualified Intermediary.

22. In a reverse exchange, how is it determined whether to park the replacement property or the relinquished property?

As a rule of thumb, it is generally easier to park the replacement property. However, when the taxpayer has financing set up for the replacement property that the lender will not allow to be in the name of the Accommodator, this cannot be done. There may be other reasons as well such as known environmental issues on the replacement property.

23. For a reverse exchange, are a double set of real estate transfer taxes applicable when there is an extra conveyance of title?

The IRS issued a ruling years ago that said for purpose of the Accommodator’s role in holing and transferring reverse exchange property, it could be considered the agent of the taxpayer and as a result extra transfer taxes did not need to be paid. There are a few states that still require payment regardless of the IRS ruling.

24. If I am doing a reverse exchange, do I still need a conventional forward exchange?

Yes, many people think if they are doing a reverse exchange, that is an alternative in lieu of the reverse exchange. That is not correct. The only thing a reverse exchange does is to allow the taxpayer to effectively control the replacement property when the corresponding relinquished property cannot be sold first. A forward exchange is still necessary to exchange the old property for the new property.

25. For a reverse exchange, do I have to get those funds being lent to the Accommodator prior to closing?

The IRS rules allow the taxpayer to lend the necessary funds to the Accommodator, but just like a bank lending funds, those funds are typically provided directly to the settlement agent and do not need to come to and through the Accommodator.

For more information regarding Section 1031 tax deferred exchanges, contact Accruit by phone – 800-237-1031 or visit Accruit's 1031 Explained page online.

Reverse 1031 Exchange: Considerations in Financing the Purchase of Replacement Property

Anonymous — Wed, 12 May 2021 22:46:16 +0000

Reverse 1031 Exchange: Considerations in Financing the Purchase of Replacement Property

Anonymous (not verified) Wed, 05/12/2021 - 22:46

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Reverse 1031 Exchange: Considerations in Financing the Purchase of Replacement Property

In a hot market or market’s with limited inventory, the 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window. (To read more about 1031 exchange process and rules, visit our 1031 explained page) Luckily, the 1031 exchange rules provide for the ‘Reverse 1031 Exchange’ to exist. Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence, also approved by the IRS, is often referred to as a “reverse 1031 exchange.” The reverse exchange technique essentially consists of an exchange accommodator holding or “parking” title to the new property on behalf of the taxpayer to avoid the taxpayer having simultaneous ownership of two properties. Immediately after the sale of the old property (but no later than 180 days) the exchange accommodator transfers the new property to the taxpayer. This 'technically' creates the proper sequence. Financing the Purchase of the Replacement Property

The concept of a Reverse 1031 exchange can sound attractive to many investors until the reality of financing the purchase of the replacement property is considered. For investors with the means to purchase the property outright in cash or those with strong lending relationships this can be relatively straightforward, however, for others they must ensure they take some nuances into consideration such as:

The title to the replacement property will be parked with an entity created by the Qualified Intermediary for the sole purpose of holding title to the property. The loan cannot be in the name of the taxpayer, but instead must be in the name of the parking entity. This requires a short-term bridge loan that can be refinanced into a longer-term loan or paid down once the old property is sold and new property is transferred into the name of the taxpayer. Many banks will not entertain these loans as they do not fit into their traditional lending model. It may take some time discussing with several local or regional banks to get them to understand the structure.
Ensure you have sufficient collateral and equity. Banks will underwrite the replacement property as well as look at the taxpayers overall financial position to ensure adequate coverage. Traditionally, banks are willing to lend between 65-75% of the replacement property’s value to qualified buyers depending on the type of property and quality of collateral.
Think about financing well in advance of pursuing a purchase through a reverse 1031 exchange. Banks take time to order appraisals and underwrite collateral for specialty bridge financing. This can be several weeks. If you are in a rush and can’t wait for a bank, there are lenders willing to provide these types of loans, but you are going to pay handsomely for it in rate and upfront fees

Financing a reverse exchange can be more difficult than a traditional loan, but it is common place for 1031s. Take the time and do the research by speaking with several banks and the right Qualified Intermediary - Accruit.

Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

Anonymous — Wed, 28 Apr 2021 17:06:43 +0000

Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

Anonymous (not verified) Wed, 04/28/2021 - 17:06

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Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

In considering selling an investment property in a fast-moving real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 explained page) In places like Dallas or Austin, Texas attractive properties will receive multiple offers on the first day of listing and can go pending same day. In a fast-paced real estate market, investors are left wondering what do you do when you still want to defer your taxable gain while taking advantage of a fast-paced real estate market from a seller's perspective?

Luckily, the 1031 exchange rules provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges.

Reverse 1031 Exchanges

Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “reverse 1031 exchange”.

The reverse exchange technique essentially consists of an exchange facilitator holding or “parking” title to the new property on behalf of the taxpayer to avoid the taxpayer having simultaneous ownership of two properties. Immediately after the sale of the old property (but no later than 180 days) the exchange company affiliate transfers the new property to the taxpayer. This 'technically' creates the proper sequence.

For example, an investor holding a commercial investment property in Dallas, Texas is looking to take advantage of the market to sell their property but is concerned about finding the right replacement property in Fort Worth. That investor decided to wait to list their property and found the perfect property replacement 60 days later and purchased it through a Reverse Exchange with the help of an exchange facilitator. Upon closing on the new purchase, the investor can now continue earning rental income on the Dallas property and has 180 days to close on the sale to defer their gain into the newly purchased Fort Worth property.

Build-to-Suit or Improvement Exchange

Build-to-Suit, also known as Construction-to-Suit or Improvement Exchange refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.

In this type of exchange, the exchange facilitator parks the replacement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.

As an example, an investor owns an office building in Austin, Texas and wants to invest in multi-family units in Houston. However, the only multi-family complexes for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an improvement exchange of real estate whereby the purchase price and improvements to the new multi-family complex can be funded through the tax deferred proceeds of the sale of the commercial property in Austin.

As you can see, tools are available to real estate investors to defer taxes and grow their portfolios in any environment. Accruit is well versed in executing all types of exchanges. You can reach our Headquarters in Denver, Colorado or our Texas Regional Office in Dallas by calling (800) 237-1031 or emailing info@accruit.com for more information.

Reverse and Improvement 1031 Exchanges in Red-hot Real Estate Markets like LA

Anonymous — Wed, 28 Apr 2021 16:52:41 +0000

Reverse and Improvement 1031 Exchanges in Red-hot Real Estate Markets like LA

Anonymous (not verified) Wed, 04/28/2021 - 16:52

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Reverse and Improvement 1031 Exchanges in Red-hot Real Estate Markets like LA

In considering selling an investment property in a red-hot real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 explained page) In places like Los Angeles or San Diego, California attractive properties will receive multiple offers on the first day of listing and can go pending same day. In a fast-paced real estate market, investors are left wondering what do you do when you still want to defer your taxable gain while taking advantage of a fast-paced real estate market from a seller's perspective?

Reverse 1031 Exchanges

For example, an investor holding a single-family rental property in Los Angeles, California is looking to take advantage of the market to sell their property but is concerned about finding the right replacement property in Anaheim. That investor decided to wait to list their property and found the perfect property replacement 60 days later and purchased it through a Reverse Exchange with the help of an exchange facilitator. Upon closing on the new purchase, the investor can now continue earning rental income on the Los Angeles property and has 180 days to close on the sale to defer their gain into the newly purchased Anaheim property.

Build-to-Suit or Improvement Exchange

In this type of exchange, the exchange facilitator parks there placement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.

For example, an investor owns an apartment rental in San Diego, California and wants to invest in single-family rentals. However, the only single-family rentals for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an improvement exchange of real estate whereby the purchase price and improvements to the new multi-family complex can be funded through the tax deferred proceeds of the sale of the apartment rental.

As you can see, tools are available to real estate investors to defer taxes and grow their portfolios in any environment. Accruit is well versed in executing all types of exchanges. You can reach our offices by calling (800) 237-1031 or emailing info@accruit.com for more information.

Reverse and Improvement 1031 Exchanges in Hot Florida Real Estate Markets

Anonymous — Wed, 28 Apr 2021 14:48:00 +0000

Reverse and Improvement 1031 Exchanges in Hot Florida Real Estate Markets

Anonymous (not verified) Wed, 04/28/2021 - 14:48

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Reverse and Improvement 1031 Exchanges in Hot Florida Real Estate Markets

In considering selling an investment property in a red-hot real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 explained page) In places like Miami or Jacksonville, Florida attractive properties will receive multiple offers on the first day of listing and can go pending same day. In a fast-paced real estate market, investors are left wondering what do you do when you still want to defer your taxable gain while taking advantage of a fast-paced real estate market from a seller's perspective?

Reverse 1031 Exchanges

For example, an investor holding a commercial investment property in Jacksonville, Florida is looking to take advantage of the market to sell their property but is concerned about finding the right replacement property in Tampa Bay. That investor decided to wait to list their property and found the perfect property replacement 60 days later and purchased it through a Reverse Exchange with the help of an exchange facilitator. Upon closing on the new purchase, the investor can now continue earning rental income on the Jacksonville property and has 180 days to close on the sale to defer their gain into the newly purchased Tampa Bay property.

Build-to-Suit or Improvement Exchange

In this type of exchange, the exchange facilitator parks there placement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.

For example, an investor owns an apartment rental in Miami, Florida and wants to invest in single-family rentals. However, the only single-family rentals for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an improvement exchange of real estate whereby the purchase price and improvements to the new multi-family complex can be funded through the tax deferred proceeds of the sale of the apartment rental.

As you can see, tools are available to real estate investors to defer taxes and grow their portfolios in any environment. Accruit is well versed in executing all types of exchanges. You can reach our offices by calling (800) 237-1031 or emailing info@accruit.com for more information.

10 Steps of a Reverse Exchange

Anonymous — Thu, 01 Nov 2018 16:39:02 +0000

10 Steps of a Reverse Exchange

Anonymous (not verified) Thu, 11/01/2018 - 16:39

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10 Steps of a Reverse Exchange

View the entire 10 Steps of a Reverse Exchange Infographic.

Accruit, LLC is a national provider of 1031 Exchange Qualified Intermediary (QI) and Exchange Accommodation Titleholder (EAT) services for simple and complex exchanges. Accruit handles all types of real property like-kind exchanges. Specialized EAT services are provided by Accruit Exchange Accommodation Services LLC.

A reverse exchange is a tax-deferred exchange that enables the purchase of new (replacement) property prior to the sale of the old (relinquished) property.

Step One

The taxpayer enters into a contract to purchase the replacement property, assuring the contract has no restriction against assigning the contract to a third party. In the unlikely event that it is so restricted, the contract should be negotiated to allow the contract to be assigned to the reverse exchange accommodator, Accruit Exchange Accommodation Services (AEAS) or a special purpose entity (SPE), typically an LLC, owned by AEAS to hold title to the property. Under IRS vernacular, the SPE is known as an Exchange Accommodation Titleholder (EAT).

Step Two

The taxpayer or their advisor contacts Accruit to start an exchange and obtain a reverse exchange document package. The taxpayer and AEAS, enter into a Qualified Exchange Accommodation Agreement (QEAA) for replacement property whereby the SPE, as the EAT, will take title on the date of closing to the replacement property. The SPE is set up with AEAS as its sole member.

Step Three

The taxpayer assigns the replacement property purchase contract to the EAT.

Step Four

Unless the taxpayer is providing 100% of the necessary funds, a taxpayer selected lending bank loans the funds required for the purchase to the EAT to enable it to acquire the replacement property. The EAT signs any applicable loan documents as the borrower, however, the taxpayer signs as the guarantor of any such loan. In the event the bank does not make a 100% loan-to-value loan, the taxpayer makes a second loan for the balance needed, which should include any earnest money that may have been previously advanced. The documents required for any taxpayer loan are furnished by Accruit and typically include a Non-Recourse Promissory Note and a Pledge Agreement of Membership Interest to secure the loan.

Step Five

The taxpayer and the EAT enter into a contract for the sale of the replacement property from the SPE to the taxpayer as well as a triple net Master Lease, which allows the taxpayer to oversee the day-to-day management of the property while it is held by the EAT. The lease provides that, in lieu of rent, the taxpayer will pay all debt service to the lender and/or the taxpayer, assuming a secondary loan from the taxpayer. Accruit may request that the taxpayer execute an Environmental Indemnity Agreement.

Step Six

Funds are sent directly to the closing by the lender and/or the taxpayer. The closing takes place and the SPE takes title to the property. Evidence of liability insurance must be furnished to Accruit showing the SPE as the insured party, while the lender and the taxpayer may appear as additional insureds.

Step Seven

Within six months (180 days) of the replacement property closing, the taxpayer enters into a contract for the sale of the relinquished property and enters into a standard Tax Deferred Exchange Agreement with Accruit, who serves as the QI. The taxpayer assigns its rights (but not its obligations) under the contract for the sale of the relinquished property to the QI and gives to the buyer(s) written notice of this assignment on or before the closing. The closing must take place within the 180-day period and the net proceeds of the sale are paid to the QI.

Step Eight

The taxpayer assigns its rights under the contract for the purchase of the replacement property (which is now being acquired from the EAT) to the QI and gives written notice of this assignment to the EAT, on or before the closing.

Step Nine

The taxpayer directs the QI to disburse the exchange proceeds to the EAT as part, or all, of the purchase price. The EAT receives the funds and immediately wires those funds to the lending bank and/or to the taxpayer to pay down all or part of the debt.

Step Ten

The taxpayer takes ownership of the replacement property via an assignment of the membership interest in the EAT which transfers the LLC, and the property it holds, from the member (AEAS) to the taxpayer. Alternatively, a deed may be issued to the taxpayer by the EAT and the LLC may be dissolved. The taxpayer takes the membership interest or the deed relating to the replacement property subject to the balance of any debt.

Note: The foregoing suggested procedural outline is made available by Accruit to interested parties and to licensed attorneys and it is intended to be used as a guideline. It is not intended to be relied upon, or viewed in any way, as legal advice, and is furnished for purposes of convenience only. As a qualified intermediary, Accruit is prohibited from providing tax or legal advice. Taxpayers must seek such counsel from their advisors.

Lending Issues for 1031 Exchanges

Anonymous — Thu, 01 Feb 2007 14:32:10 +0000

Lending Issues for 1031 Exchanges

Anonymous (not verified) Thu, 02/01/2007 - 14:32

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Lending Issues for 1031 Exchanges

These TIC purchases often require commercial bank lending. For a 100% tax deferred exchange, the exchanger needs to make sure that all of the net proceeds from the sale of their old property are utilized for the TIC purchase. Additionally, any mortgage debt paid off from the sale of their old property must be replaced. Many of the commercial lenders for these TIC purchases require the bank lending be made to a Delaware LLC entity. This creates the requirement for the 1031 exchanger to have a single member LLC for each party of the exchange.

Check out the following lending issues prior to your 1031 exchange transaction:

1. Clean up the old property title by transferring it to your individual name. Mortgage portfolio lenders will not lend to living trusts, revocable trusts, partnerships, or limited liability companies. Remember that the IRS considers a single owner trust, a single member limited liability company or a husband and wife owned partnership as a disregarded entity. This means that you can transfer ownership back and forth with no federal tax effects and still obtain the mortgage lending. Be sure to check that you do not trigger a "due on sale clause" in your mortgage note when transferring such ownership back and forth.

2. Mortgage lenders understand the purpose of a 1031 exchange – investment property purchase. Do not try to obtain 2nd home mortgage financing for a 1031 replacement property. The underwriters will not fund a loan if you misrepresent the use of the property.

3. If proceeds from a mortgage loan cause an exchanger to receive cash at closing of the replacement property, the exchanger will incur a tax liability. Instead request to have your earnest money refunded or apply the excess as a principal reduction payment on the settlement statement to avoid capital gains tax.

4. When participating in a reverse exchange do not utilize a residential mortgage lender who sells their loans to other investors. Only commercial banks will lend to a Limited Liability Company (LLC) which acts as the parking entity for a reverse exchange. The commercial bank will want the exchanger to guarantee the loan or will tie up additional collateral the Exchanger may have. Some commercial banks are resistant to lending to the LLC entity which parks the replacement property for the exchanger. Other commercial banks look to the credit strength of the exchanger and will fund 90 to 100% of the purchase price. Generally, the lending is bridge type financing and can be interest only. Often reverse lending loans take more time to fund as there are additional requirements such as environmental reports, surveys, commercial appraisals, liability insurance and the loan committee approval process. Understanding the commercial bank requirements for a reverse parking loan will allow an exchanger to coordinate closing dates, allowing time for loan processing.

5. Many exchangers purchase replacement property in the form of Tenant- In-Common (TIC) percentage interests in large commercial or apartment complexes.

6. Realize that mortgage lenders often cannot fund a loan on the day of closing. Occasionally, exchangers will coordinate simultaneous exchange closings at the same title company to save on exchange fees. Both the old property sale and the new property purchase must occur on the same day. If the buyer's mortgage lender does not fund their loan when the old property is sold, the sale is closed in escrow. The exchanger should not continue with the closing paperwork for the purchase of the new property without a qualified intermediary involved. The 1031 exchange will not be allowed by the IRS if the old property closes in escrow without the use of a qualified intermediary.

7. Be careful when you refinance to take money out of your old investment property. An exchanger should not obtain cash out refinance on their old property immediately before their 1031 exchange transaction. The IRS will not allow the 1031 exchange if an exchanger cannot prove they used the cash proceeds to improve the old property. Remember that an exchanger can immediately refinance their new replacement property after the 1031 exchange transaction is complete and take cash out without any tax ramifications.

For the savvy real estate investor, a 1031 exchange can defer taxes and generate more cash flow and appreciation potential. Part of the equation for higher cash flow is to structure the best possible mortgage loan. By planning, exchangers will obtain their investment goals with the flexible mortgage products available in the marketplace. Plan your next 1031 exchange with lending issues in mind! Please note that all material provided in this newsletter is for informational purposes only and the author is not providing legal, tax accounting or other professional services. The accuracy of the information provided as it pertains to your situation is not guaranteed.

Please seek professional consultation if legal, tax accounting or other expert assistance is required.

Please note that all material provided in this newsletter is for informational purposes only and the author is not providing legal, tax accounting or other professional services. The accuracy of the information provided as it pertains to your situation is not guaranteed. Please seek professional consultation if legal, tax accounting or other expert assistance is required.

reverse exchange

1031 Exchange Explained - Top 25 FAQ's Answered by Subject Matter Experts

1031 Exchange Explained - Top 25 FAQ's Answered by Subject Matter Experts

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1031 Exchange Explained - Top 25 FAQ's Answered by Subject Matter Experts

Top 25 1031 Exchange FAQs

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Reverse 1031 Exchange: Considerations in Financing the Purchase of Replacement Property

Reverse 1031 Exchange: Considerations in Financing the Purchase of Replacement Property

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Reverse 1031 Exchange: Considerations in Financing the Purchase of Replacement Property

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Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

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Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

Reverse 1031 Exchanges

Build-to-Suit or Improvement Exchange

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Reverse and Improvement 1031 Exchanges in Red-hot Real Estate Markets like LA

Reverse and Improvement 1031 Exchanges in Red-hot Real Estate Markets like LA

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Reverse and Improvement 1031 Exchanges in Red-hot Real Estate Markets like LA

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Reverse and Improvement 1031 Exchanges in Hot Florida Real Estate Markets

Reverse and Improvement 1031 Exchanges in Hot Florida Real Estate Markets

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Reverse and Improvement 1031 Exchanges in Hot Florida Real Estate Markets

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10 Steps of a Reverse Exchange

10 Steps of a Reverse Exchange

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10 Steps of a Reverse Exchange

View the entire 10 Steps of a Reverse Exchange Infographic.

Step One

Step Two

Step Three

Step Four

Step Five

Step Six

Step Seven

Step Eight

Step Nine

Step Ten

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Lending Issues for 1031 Exchanges

Lending Issues for 1031 Exchanges

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Lending Issues for 1031 Exchanges

Check out the following lending issues prior to your 1031 exchange transaction:

2. Mortgage lenders understand the purpose of a 1031 exchange – investment property purchase. Do not try to obtain 2nd home mortgage financing for a 1031 replacement property. The underwriters will not fund a loan if you misrepresent the use of the property.

5. Many exchangers purchase replacement property in the form of Tenant- In-Common (TIC) percentage interests in large commercial or apartment complexes.

Please seek professional consultation if legal, tax accounting or other expert assistance is required.

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