When is a Reverse 1031 Exchange the Right Choice?
Tax-deferred exchanges are great opportunities for real estate investors. In a typical property transaction, the seller is hit with the capital gains tax. Fortunately, section 1031 of IRS code stipulates that no gain or loss will be recognized in a qualifying exchange. A tax-deferred exchange is not as simple as swapping properties though. There are specific deadlines the exchanger must meet in order to reap the tax benefits. Once the first property is relinquished, the replacement must be identified within 45 days and closed on within 180 days. If this schedule in not met, the exchanger stands to lose all the deferred benefits of the 1031 code. In the right context, a traditional 1031 can be ideal. In other situations, investors may benefit from more specialized types of exchanges. The investor who finds a new property before selling the like-asset will need something more advanced than a conventional exchange. This sort of investor should consider a 1031 reverse exchange.
There are many advantages to a reverse exchange, but the most obvious is that a property owner can find a replacement like-asset without time constraints. Controlling a replacement property in advance of selling the initial asset alleviates much of the pressure involved in a traditional exchange. A reverse exchange is an appropriate option for the investor who is ready to purchase a new building but has not yet sold the initial property of the exchange. In essence, a reverse 1031 avoids the risk of having to pay substantial capital gains taxes on a sale should an exchange property not be purchased in time.
However, a reverse exchange is not entirely without defined deadlines. The schedule for a reverse exchange is identical to that of a traditional exchange, except the relinquished asset and replacement asset trade roles. In a reverse 1031, the relinquished property must be identified within 45 days of purchasing the replacement. In addition, the relinquished property must actually be relinquished within 180 days.
The 1031 code can be hugely advantageous for investors. The tax saving are, in effect, like a 0% interest loan from the federal government that extends indefinitely. Many options and variations exist for exchangers looking for a tax-deferred benefit. But for the investor who has found a replacement property prior to selling anything from his or her portfolio, the reverse 1031 exchange is the clear choice.
Information from this article taken from http://www.allstates1031.com/
Christine Casalini is a freelance writer in Boston, MA. Her interests are investing, real estate and personal finance.
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