Martin Edwards

Using a White Knight to Rescue a Failing Reverse Exchange

What is a Reverse Exchange and What Causes it to Fail?

A conventional IRC §1031 tax deferred exchange involves, among other things, a taxpayer’s sale of old property (the “relinquished property”) followed by the purchase of new property (the “replacement property”) within a 180 day period (see ). A so-called reverse exchange takes place when the taxpayer is forced to acquire the replacement property, or face losing it, prior to the sale of the relinquished property.  The sequence of the disposition and acquisition is “reverse” from the conventional transaction.

Trusts, Wills, Probate & 1031 Exchanges

Property ownership is often held by various kinds of trusts. Each type of trust exists for its own special purposes and is governed by different legal principles. These trusts can be confusing and so too can be their interrelationship with wills and probate. Sometimes property sold as part of a 1031 tax deferred exchange involves trust ownership. This blog will attempt to clarify some of the confusion and touch on how various types of trust-holding impacts completing a 1031 exchange.

Seller Financing in a 1031 Tax-Deferred Exchange

In a sale of real estate, it’s common for the seller, the taxpayer in a 1031 exchange, to receive money down from the buyer in the sale and to carry a note for the additional sum due. The taxpayer facilitates financing for the buyer in this way to make the transaction happen. Sometimes this arrangement is entered into because both parties wish to close, but the buyer’s conventional financing is taking more time than expected. If the buyer can procure the financing from the institutional lender before the taxpayer closes on their replacement property, the note may simply be substituted for cash from the buyer’s loan. Regardless of the circumstance for seller financing, without further steps, the taxpayer’s use of the value of the note toward the purchase of the replacement property will be taxable.

Misconceptions about 1031 Like-Kind Exchanges

1031 tax-deferred exchanges were established as part of United States tax law in 1921, yet there are still misconceptions about like-kind exchanges and how they work. Let's clear up a few in this post.

1031 Tax-Deferred Exchanges as an Important Estate Planning Tool

There are many factors which motivate taxpayers to complete tax-deferred exchanges when selling real estate. Such considerations can include:
  • Consolidate many properties into fewer properties
  • Diversify fewer properties into more
  • Trade appreciated low cash flow property for high cash flow property
  • Maximize ability to borrow against properties using bank funds rather than owner’s
  • Trade for higher basis property to take advantage of depreciation deduction
  • Acquire property closer to owner in the event of relocation

What are the effects of tax reform on 1031 tax-deferred exchanges?

Tax deferral afforded through Section 1031 like-kind exchanges has been under threat of repeal or being reduction for many years. A committee made up members from the Senate Finance Committee and the House Way and Means Committee known as The Joint Committee on Taxation have made such recommendations many time over the past few decades. Cutbacks to Section 1031 had been recommended as far back as President Clinton’s administration. In 1997, that administration suggested requiring exchanges to be limited to “same-kind” properties rather than like-kind (any kind of real estate is like-kind to any other type of real estate). It came as no surprise that the recent House and Senate proposals for tax reform chose to whittle down Section 1031 in order to raise tax revenues to offset some of the tax reductions contained in the reform plans.

A 1031 Exchange by Any Other Name...

Over the years IRC Section 1031 tax-deferred exchanges have been known by many names. In addition, there are many different types of exchanges that one way or another relate to Internal Revenue Code Section 1031. Let’s take a look at some of these names and transaction types.

How Federally Declared Disasters Affect 1031 Exchanges

With so many weather-related natural disasters occurring with seemingly increasing frequency, let’s take a look at how such disasters affect persons seeking to complete exchange transactions. While the safe harbor timelines for conventional forward exchanges and for reverse exchanges are strictly enforced, there is some relief afforded in the event of a federally declared disaster in the form of time granted. The applicability of a particular federally declared disaster can be found on the IRS website, which provides news releases covering disaster events.

Are like-kind exchanges still advisable with tax reform on the horizon?

Often, when learning of the tax deferral benefits of like-kind exchanges for the first time, sellers are surprised. It seems too good to be true, but it is. Capital gains taxes, recapture of depreciation, state taxes and a health care tax can all be deferred in full. But given the current climate of impending tax reform, is it still advisable?

What is an escrow and how does it benefit me?

Escrow is an arrangement in which transacting parties retain a third party, an escrow agent or escrowee, whose job is to safeguard funds and assets according to conditions that have been agreed upon in advance. Such an arrangement protects the transacting parties in the deal, providing that neither has an unfair advantage and that both are earnest about the deal.

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