1031 Exchange
Reverse 1031 Exchange Explained
A standard 1031 exchange requires you to sell first and buy second. But what if the perfect replacement property comes on the market before your current property has sold?
That’s exactly the situation a reverse 1031 exchange is designed to solve. Here’s how it works.
Key takeaways
- A reverse exchange lets you acquire the replacement property before selling your relinquished property.
- An Exchange Accommodation Titleholder (EAT) temporarily holds title to one of the two properties.
- The same 45-day and 180-day deadlines apply, but in reverse order.
- Reverse exchanges are more complex and expensive than standard exchanges, and require specialized professionals.
- They’re best used when a strong replacement property might not still be available once your current property sells.
What is a reverse 1031 exchange?
A reverse 1031 exchange allows an investor to acquire their replacement property before selling their relinquished property, reversing the typical order of a standard exchange. This lets buyers secure a strong opportunity without risking losing it while waiting for their current property to sell.
Why a reverse exchange requires a different structure
In a standard exchange, the same taxpayer can’t own both the relinquished and replacement property at the same time while deferring the gain. The IRS structure requires a sale first. To solve this in a reverse exchange, an entity called an Exchange Accommodation Titleholder (EAT) is used to temporarily hold title to one of the two properties.
Many investors complete a reverse exchange by purchasing a triple net lease property that offers long-term passive income.
The two reverse exchange structures
Exchange last (most common)
The EAT acquires and holds title to the replacement property on your behalf while you continue marketing and selling your relinquished property. Once your relinquished property sells, the replacement property is transferred from the EAT to you, completing the exchange.
Exchange first
The EAT acquires and holds title to your relinquished property, allowing you to close on your desired replacement property immediately, before your original property sale is finalized. This structure is used less frequently but can fit specific situations.
The timeline for a reverse exchange
Reverse exchanges follow a similar 45-day and 180-day framework, but the deadlines apply in reverse:
- Within 45 days of the EAT acquiring the parked property, you must identify which of your current properties you intend to sell (in an exchange-last structure) or provide equivalent identification documentation
- Within 180 days of the EAT’s acquisition, the relinquished property sale must close and the parked property must be transferred to you, completing the exchange
Important: Because both deadlines are just as strict as in a standard exchange, a reverse exchange requires careful planning from the outset.
Why investors use reverse exchanges
- Securing a strong replacement property that might otherwise sell to another buyer while you’re still marketing your current property
- Avoiding a rushed sale of your current property just to meet a standard exchange deadline
- More negotiating leverage on the purchase side, since you’re not under pressure to close within a compressed window after identifying a property
The trade-offs of a reverse exchange
- More complex and expensive. Legal and accommodation fees are typically higher than a standard exchange due to the EAT structure.
- Requires financing flexibility. You’ll often need to fund the replacement property purchase (personally or through the EAT) before your original property sale proceeds are available.
- Fewer intermediaries offer this service, and it requires more advance coordination than a standard exchange.
When a reverse exchange makes sense
A reverse exchange is worth considering when you’ve found a strong replacement property, a well-priced NNN asset with a desirable tenant and lease term, and you’re concerned it won’t still be available by the time your current property sells. It’s a specialized tool, best used with experienced 1031 professionals guiding the structure from the start.
Educational notice: Reverse exchanges are among the most complex 1031 structures and require specialized qualified intermediaries and legal guidance. Always work with professionals experienced specifically in reverse exchanges before proceeding.
Frequently asked questions
Can I own both properties at the same time in a reverse exchange?
Not directly. An Exchange Accommodation Titleholder temporarily holds title to one of the two properties so you’re never technically holding both at once.
Which structure is more common, exchange last or exchange first?
Exchange last is the more common structure, where the EAT holds the replacement property while you sell your relinquished property.
Are the 45-day and 180-day deadlines the same in a reverse exchange?
The same time frames apply, but they run from the date the EAT acquires the parked property rather than from a sale closing, and the order of steps is reversed.
Is a reverse exchange more expensive than a standard exchange?
Generally yes. Legal and accommodation fees tend to be higher due to the added EAT structure and increased complexity.
Considering a reverse exchange?
QEM Estates works with buyers pursuing reverse 1031 exchanges to identify strong NNN properties and coordinate with your exchange accommodation titleholder and legal team.