Oct 23, 2008

1031 Exchange

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By: Scott Adams

1031 Exchange

Buy first, sell later!
In a 1031 exchange, it is sometimes desirable to purchase your replacement property prior to selling the relinquished property.  Perhaps a property becomes available through Coldwell Banker Commercial and you want to purchase it right away. Section 1031 allows you to "buy first and sell later." These are commonly referred to as "reverse exchanges."

"Parking" Arrangements
Until recently, no officially sanctioned reverse exchange procedure existed. To accomplish traditional reverse exchanges, "arms-length" transactions were set up. Although "Safe Harbor" reverse procedures were introduced in 2000, many reverse exchanges are still accomplished through traditional methods.

For example, if Coldwell Banker Commercial offered replacement property you wanted to acquire before you sold your relinquished property, Summit 1031 Exchange would set up the Special Purpose Entity to buy and hold the new property for you.  Then, when the relinquished property sells, you would exchange it for the property being held by the SPE. Alternatively, the relinquished property could be parked by the SPE, and you could exchange into the new property.  When a buyer for your original property is found, then the buyer would purchase the property from the SPE.

Safe Harbor Reverses  
In 2000; the I.R.S established a new procedure for effecting reverse exchanges under the safe harbor. However, they also explicitly recognized that the traditional "parking" type methods could be accomplished outside of the safe harbor.

To be, or not to be under Safe Harbor
The safe harbor procedure complicates the reverse exchange landscape in some ways, particularly with respect to exchange timing.  The safe harbor maintains the 180-day time limitation to complete the exchange. In instances where the sale of the relinquished property can be easily accomplished within the 180 day time frame the new guidelines provide for a relatively straightforward exchange experience.

However, if no buyer for the relinquished property is in sight, or several properties are under consideration as the possible relinquished property, the safe harbor may not allow enough time. In such instances, the more traditional "parking" arrangement may provide for more flexibility in the timing of the sale, since the "exchange period" would not technically start until the relinquished property is actually sold.

One should be aware that safe harbor arrangements might seriously jeopardize the exchange IF it cannot be completed under the 180-day time limit. It is critical that the 1031 company be experienced in both kinds of reverse exchanges. To qualify under the new guidelines, very specific protocols must be followed. Under the older parking arrangements, the reverse exchange must maintain an "arms-length" structure in order to be successful.

Summit 1031 Exchange has extensive experience in facilitating reverse exchanges, insuring a trouble-free and flexible transaction that suits the client's specific needs.  Coupled with Coldwell Banker Commercial, you've got a winning team in the acquisition of real estate and a successful exchange!

Contributed by:
Scott Adams
President
Summit 1031 Exchange, LLC
Whitefish: 406-863-1031
Kalispell: 406-755-1596
Fax: 406-755-1597

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