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Unlike a typical 1031 exchange, you may need to buy your new property before you have sold the old one. Unfortunately, IRS regulations don’t allow you to own title to the old and new properties at the same time.

The good news is, a reverse exchange allows you to exchange property in reverse order -- and yet still enjoy the tax benefits. In a reverse exchange, your QI must arrange to buy the new property for you and hold it for a period of time.

How can a Reverse 1031 Exchange Help Me?

There are several reasons you may want to buy new property before you have sold your old property, for example:

• Market conditions are making it difficult to find a buyer for your sale property.

• You face the possibility of losing an earnest money deposit, or favorable financing rates.

How does the IRS Treat Reverse 1031 Exchanges?

In 2000, the IRS issued Revenue Procedure 2000-37, a ruling that clarified the IRS' position regarding reverse exchanges. As a result, there are now two types of reverse exchanges:

"Safe Harbor" Reverse Exchange
Revenue Procedure 2000-37 established "safe harbor" procedures -- IRS-approved guidelines for structuring a reverse exchange. Although these procedures are somewhat restrictive, meeting them ensures that the IRS will not disallow the exchange.

While Traditional and Safe Harbor exchanges are similar, there are unique considerations and procedures for each. Consulting with The Exchange Experts to structure an exchange that both meets your needs and stands up to IRS scrutiny is critical.

How Does a Reverse Exchange Work?

In a reverse exchange, your QI must arrange to buy and hold your new property until your exchange can be completed. This is done with an entity (usually a limited liability company) that the IRS calls an Exchange Accommodation Titleholder, or "EAT."

A primary concern for any reverse exchange is financing. As the purchaser, the EAT must have the funds needed to purchase the new property. As the ultimate buyer, it is up to you to provide those funds. The easiest way to do this is for you to become the lender and provide the necessary cash to the EAT. Of course, that is not always feasible. Therefore, exchangers often need to obtain financing (in the name of the EAT) from a lending institution.

The Experts can help you with this too! We have contacts with lenders who work with exchange clients -- lenders who are familiar, knowledgeable, and comfortable with the reverse exchange process. Call us for help with arranging and choosing the best financing solution for your exchange.

How will The 1031 Exchange Experts protect me?

With The Exchange Experts, providing security for your assets is our first priority. Here's how we do it:

First, we create and register a limited liability company to serve as the EAT. The EAT is used only for your exchange.

Second, we secure your investment. To ensure repayment of financing to you or the lender, The Experts create the appropriate security instruments, including a promissory note and a deed of trust or mortgage.

Third, we enter into a binding contract that ensures the transfer of the new property to you and restricts the EAT from borrowing against the property.

In addition, you are protected by The Exchange Experts' comprehensive SafeGuards system, which protects you in any exchange we facilitate:

• All of our exchanges are handled by CPAs and real estate tax and accounting professionals.

• Your funds are kept in a segregated account at a reputable, FDIC-insured bank.

You can trust our experience as well. We've completed thousands of qualified 1031 exchanges.

• You need to construct improvements or buildings on land you are purchasing.

In these circumstances, a normal 1031 exchange may not be possible. However, a reverse exchange may allow you to preserve the flexibility, leverage and buying power of tax deferral.

Traditional Reverse Exchange
Despite the issuance of the Revenue Procedure, the IRS has recognized that some valid reverse exchanges cannot be completed within the Safe Harbor structure and its 180-day deadline.

For example, if your new property includes a construction project, it is often difficult to complete it within 180 days. These Traditional (non-Safe Harbor) exchanges have helped clients with specialized needs for many years.