The exchanger can purchase replacement property first, however the exchanger cannot hold title to both the relinquished property and the replacement property at the same time. If the seller of the replacement property is not willing to wait until your relinquished property closes, then you have the option of completing a reverse exchange.
The 1031k Exchange company creates an LLC to take title to one of the properties, either the relinquished or the replacement, whichever they deem more feasible. A promissory note is created between the exchanger/taxpayer and the LLC, wherein the exchanger/taxpayer loans the funds to the LLC to purchase the replacement property.
The reverse exchange structure is opposite the delayed exchange structure in that the exchanger has 45 days from closing on the replacement property in which to identify the relinquished property(ies) being sold in the exchange. The exchanger/taxpayer has up to 180 days to sell the relinquished property(ies) to a third party buyer. At that time, the LLC will deed the replacement property to the taxpayer/exchanger, thus completing the exchange.
Due to the complexity of a reverse exchange, the exchange fees can run $5,000.00 or more(for Residential) plus the cost of the limited liability company established to hold the “parked” property during the exchange period. In order to open the reverse exchange, the 1031k Exchange Company will need to speak with the exchanger, the Lender and the Escrow Officer. The 1031k Exchange Company will need at least ten business days (sometimes more, depending on the complexity of the transaction) to set up the reverse exchange. Please note that exchange documents must be in place and signed prior to any closings taking place, in order to have a valid 1031 exchange.
If the replacement property is a commercial piece of property, the 1031K Exchange Company will require a current Phase I Environmental Report. A reverse exchange is a complicated transaction; accordingly, you are strongly advised to retain the services of a tax advisor to assist you and guide you through your 1031 tax deferred exchange.
(Please note that 1031k exchange requirements can change at any time. It is very important to speak with your tax advisory and/or a qualified intermediary prior to selling or purchasing any properties you are considering exchanging).
Special Thanks to our two favorite 1031 Exchange Companies for providing the above information. Information is deemed reliable but subject to change as IRS regulations change. Please visit their websites for more detailed information.