Most people familiar with the 1031 Exchange process know the standard forward process that includes selling a property and then acquiring a replacement property. Of course, this isn’t the only way to do things. One option, a tax deferment strategy in part, is a Reverse 1031 Exchange that allows an investor to acquire the new property before getting rid of the old property. Of course, the biggest part of being successful here is in understanding the process.
What Is a Reverse 1031 Exchange?
A Reverse 1031 Exchange is a real estate transaction that involves acquiring a replacement property before the relinquished property is sold and transferred. The reverse exchange process only applies to 1031-eligible properties, and they are only permitted in situations where the investor has the means to make the new purchase without the profits of the current property sale.
The timeline for this process follows the same timeline as a standard 1031 Exchange. However, the rest of the process is far more complex and takes a lot of careful planning. One item to consider when planning is the cost of going this route. For some, it’s worth the investment. For others, the cost may be too prohibitive to make it a smart financial move.
Fortunately, most states have standardized rates so it’s easy to get an idea of what to expect before you actually commit to the Reverse 1031 Exchange process. Before we get into the costs, though, let’s take a quick look at the process:
- First, the investor chooses an intermediary to hold the title of the new property until the old one is relinquished. The investor cannot hold title to both properties at once, so this third party is needed to complete the transaction. This process will take some work to hammer out all the details, but it is the biggest step in the process for several reasons.
- The second step comes in entering into a Purchase and Sales Agreement (PSA) with a seller so that the transaction can be completed.
- Then, the Qualified Intermediary will prepare the closing documentation. Identifying the property that will be sold and then entering into a PSA come next, and are part of the closing process that requires careful documentation.
- There will be a PSA between the buyer of the old property and the investor, which will create the paperwork needed to allow the transaction.
- Finally, closing documents and all agreements will be signed by all parties involved.
Here are a few quick rules that apply to the Reverse 1031 Exchange:
- These transactions must be completed within 180 calendar days from the closing of the initial deal
- The same related party and disqualified person guidelines apply
- The taxpayer that is buying must also be the one that is selling
- The replacement property has to be of greater (or equal) value
- Neither property can be a primary residence of the involved taxpayer
What Is the Average Cost of the 1031 Exchange?
Of course, there is no hard-and-fast rule for exact costs on a 1031 exchange. However, through research, you can find ranges that will give you an idea of what to expect. Understanding what this range is and how it is determined will help you assess what you can expect. Of course, when you work with a reputable source, you should be provided with an estimate that includes the cost of the service. The complexity and range of state fees associated with this transaction often make the costs much higher, but that will also vary from one state to the next.
The average range of a Reverse 1031 Exchange cost is between $4,500 and $7,500. This could be influenced by how many properties are involved, also, because there may be a premium cost of $400-$600 for each additional property included in the exchange. This may be higher than some people anticipate, but you have to remember that several states standardize their fees. That makes it easy for you to find peace of mind in securing your ideal property.
What to Do Next
If you have more questions about this investment product or any related subjects, contact investment professionals today. The Reverse 1031 Exchange is a useful tool, but only when you use it correctly and the pros can ensure the process goes off without a hitch.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits.