1031 Exchanges: Can You Buy a Replacement Property First?

Buying a replacement property before selling a relinquished property is possible with a reverse 1031 exchange. Conducting a reverse 1031 exchange involves establishing an Exchange Accommodation Titleholder (EAT) to hold the title to the replacement property until the relinquished property is sold. This is one of several parts of the process that require taxpayers to engage experienced 1031 exchange specialists to guide them through the process.

Timing is a key consideration when conducting a 1031 exchange. Strict deadlines apply under Section 1031 of the Internal Revenue Code, and failure to comply with these deadlines can result in loss of indefinite tax deferral eligibility.

So, what happens if you want to acquire your replacement property first?

This is referred to as conducting a reverse 1031 exchange. Conducting a reverse 1031 exchange is permissible under the Internal Revenue Code, and it can be a desirable option in a variety of circumstances. If you have the capital available and you identify a desirable property before you have the chance to sell the property that you plan to let go as part of the exchange, you can conduct a reverse exchange and preserve your tax deferral eligibility under Section 1031.

What Are the Requirements for Conducting a Reverse 1031 Exchange?

The requirements for conducting a reverse 1031 exchange are fundamentally the same as those for an exchange in which a taxpayer first sells their relinquished property (a delayed exchange). With this in mind, the basic requirements for conducting a reverse 1031 exchange include:

• The taxpayer must comply with the timing requirements established by Section 1031;
• The taxpayer must avoid the receipt of “boot” (unless the taxpayer is prepared to pay tax or use these excess funds to improve their replacement property); and
• The taxpayer must avoid coming into possession of either the replacement property or the proceeds from the sale of the relinquished property too soon.

To comply with this last requirement, taxpayers conducting reverse 1031 exchanges must use an Exchange Accommodation Titleholder (EAT). An EAT is an entity that is formed for the sole purpose of holding the title to a taxpayer’s replacement property until the taxpayer’s 1031 exchange can be closed. Our 1031 exchange specialists have extensive experience helping taxpayers form and use EATs during the like-kind exchange process.

What Deadlines Apply to a Reverse 1031 Exchange?

Two key deadlines apply to reverse 1031 exchanges. First, taxpayers must formally “identify” their relinquished property (the property to be sold) within 45 days of acquiring their replacement property. Second, taxpayers must close on the sale of their relinquished property within 180 days of closing on the acquisition of their replacement property.

Do I Need to Identify the Acquisition as Being Part of a 1031 Exchange?

Yes, when conducting a reverse 1031 exchange, it is imperative that taxpayers identify the acquisition of their replacement property as being part of a like-kind exchange. Taxpayers should include relevant language in the purchase agreement for the property—in addition to ensuring that the title to the property is transferred directly to their EAT.

FAQs: Buying a Replacement Property First in a Reverse 1031 Exchange

Can I sell a property first to start a 1031 exchange?

Yes, under Section 1031 of the Internal Revenue Code and the IRS’ current regulations, it is possible to sell a property first to start a 1031 exchange. However, strict requirements apply, and taxpayers must establish an Exchange Accommodation Titleholder (EAT) to hold the title to their new property while their 1031 exchange is pending.

What is an Exchange Accommodation Titleholder (EAT)?

An Exchange Accommodation Titleholder (EAT) is a special-purpose entity (commonly a single-member LLC) formed for the sole purpose of facilitating a reverse 1031 exchange. The EAT holds the title to the taxpayer’s replacement property until the sale of the taxpayer’s relinquished property, at which time the exchange can be finalized.

What if I can’t find a buyer for the property I am planning to sell?

Failing to find a buyer for the property you are planning to sell could result in loss of indefinite tax deferral eligibility under Section 1031. That said, there are options in this scenario, and our 1031 exchange specialists can explain everything you need to know.

Schedule a Call with Our 1031 Exchange Specialists

If you would like more information about the steps involved in conducting a reverse 1031 exchange, we invite you to get in touch.  888-872-1031 or contact us online to schedule a call with one of our 1031 exchange specialists today.