A Reverse
Exchange may be the best alternative to save a 1031 deferred
exchange transaction when a taxpayer needs to purchase their
replacement property prior to the sale of their relinquished
property. The mechanics of a reverse exchange may seem complicated,
so the following general guidelines will help.
Before starting, an exchanger should review their plan with their
tax advisor and a qualified intermediary. Discuss all the fees
involved, the bank’s lending fees if utilizing bridge financing,
exchange fees, and the tax on any cash proceeds received. Review the
actual long term capital gain and depreciation recapture. This will
help determine if the benefits of a reverse exchange outweigh the
costs involved.
Once an exchanger decides to proceed with a Reverse Exchange there
are some contract considerations: Generally the purchase contract is
assignable from the exchanger to a Limited Liability Company (LLC)
setup by a qualified intermediary such as Bankers Escrow. Typically,
the phrase “and or assigns” after the buyer’s name will suffice. If
the exchanger has a contract in place for the replacement property
purchase, it will need to be amended, assignable to the LLC.
The mechanics for a Reverse Exchange are as follows:
Phase 1: The LLC purchases and “parks” the replacement
property. Remember that the LLC is not using any of its own funds to
purchase. This will come from the bank and/or the exchanger and
takes time to obtain.
Both the identification and completion deadlines are triggered at
purchase date of the new property by the LLC. The exchanger will
have 45 days to identify their old property and 180 days to sell it.
They must purchase the parked property from the LLC by the 180th
day.
Reverse Documents are signed at closing by the exchanger; this
includes the “Option Agreement” to purchase the parked property from
the LLCBankers Escrow will
coordinate with the closer and lender to insure compliance with
I.R.S. requirements for reverse exchange documentation. A lease is
entered into with the LLC so that the exchanger can utilize the
parked property.
Phase 2: The exchanger will need to sell the relinquished
property within 180 days of the replacement property parking. There
is no extension available. If the relinquished property does not
sell by the 180th day, the LLC will convey the parked property to
the exchanger and there is not a successful reverse 1031 exchange
transaction.
Phase 3: At the sale of relinquished property, proceeds are
sent to Bankers Escrow to be utilized for the replacement property
purchase.
Phase 4: The LLC sells the parked replacement property to the
exchanger.
An Option Notice is exercised by the exchanger. The option purchase
price will be the actual cost that the LLC incurred to purchase the
parked property.
Bankers Escrow will coordinate with the closing agent to sell the
parked property held by the LLC to exchanger. Proceeds from
relinquished property sale will pay down loans used to initially
purchase the property.
Take the time to review a contemplated reverse exchange with a tax
advisor as each investor’s tax situation is unique. A Reverse
Exchange can be a very powerful tax planning strategy. For more
information, please contact the 1031 Department at Bankers Escrow
303-986-4848 or 800-571-6595.
© 2006 Bankers Escrow Corporation
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The author, Mary
Lou Schwab CPA is Vice President at Bankers Escrow and oversees the
1031 Exchange Division. She obtained her Certified Exchange
Specialist (CES) designation in 2004. She has over 25 years of real
estate taxation experience and is also a real estate investor. Mary
Lou’s expertise is with the structuring of complex exchanges
including reverse exchanges and construction improvement exchanges.
Mary Lou can be reached at 303-986-4848 or toll free at 800-571-6595
and at her email
marylou@bankersescrow.com
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Bankers Escrow Corp.
44 Union Blvd. Suite 115
Lakewood, CO 80228
Phone:
303-986-4848 or 800-571-6595
www.bankersescrow.com
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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. |
