1031 Exchange

1031 exchange is one of the most popular tax strategies available when selling and buying real estate “held for productive use in a trade or business or investment”. Taxpayers use 1031 exchanges to increase cash flow by deferring taxes on gains realized through the sale of real estate if they reinvest those gains in the replacement property.

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1031 Exchange

1031 exchange is one of the most popular tax strategies available when selling and buying real estate “held for productive use in a trade or business or investment”. Taxpayers use 1031 exchanges to increase cash flow by deferring taxes on gains realized through the sale of real estate if they reinvest those gains in the replacement property.

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Types of Exchanges

Forward or Deferred 1031 Exchange

In a forward 1031 exchange, the taxpayer, and the qualified intermediary (QI) set up an exchange agreement before any sales transaction. The taxpayer assigns their rights to sell the relinquished property to the QI. The QI will act as the seller of the property and hold the funds in an exchange account for benefit of the taxpayer. The taxpayer has the first 45 days of the exchange to identify potential replacement property. Once a replacement property is selected, the rights to acquire that property are assigned to the QI. The taxpayer must close no later than 180 days after the closing of the relinquished property. After negotiating the price and executing a purchase contract with the seller of the replacement property, the taxpayer will assign the rights to purchase the replacement property to the QI. The funds held in the exchange account are sent directly to the closing agent, the taxpayer will receive their tax-deferred property and finalize their exchange.


Reverse 1031 Exchange

A reverse exchange, also referred to as a parking exchange, occurs when taxpayers purchase their replacement property before selling their relinquished property. When the exchange company services a forward exchange, it acts as a qualified intermediary (QI). When an exchange company services a reverse exchange, it takes title of a property (primarily the replacement property) through a specially created entity, usually a single-member LLC.

It is referred to as an exchange accommodation titleholder (EAT). The taxpayer first enters a contract to purchase the replacement property and then enters a reverse exchange agreement with the entity acting as the EAT. If the taxpayer is not providing all necessary funds to buy the replacement property, they must select a bank to loan the funds required to purchase the replacement property to the EAT.

The EAT takes title of the new property and “parks” or holds that title until the taxpayer sells the relinquished property as part of a conventional forward exchange. After selling the relinquished property, the QI holds and disperses the funds to the EAT to purchase the replacement property. The EAT takes those funds received and repays any financing made by the taxpayer. Lastly, the taxpayer takes ownership of the replacement property.

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Contact your Meridian Title Account Manager for more information or to receive a quote.