This situation is called a reverse exchange. If at all possible, it is better for you to sell and close on your relinquished property first, before acquiring the replacement property and Independent Trustees can work with you to see if your transaction can be structured this way. Sometimes, however, this is just not possible, and the replacement property must be acquired immediately to avoid losing the deal. This process is costly and the fees can be between $4000.00 and $10,000.00 depending on the complexity of the transaction.
This is how a reverse exchange will work in order for you to take advantage of Section 1031. Independent Trustees will set up a limited liability company, called the Exchange Accommodation Titleholder or EAT to acquire your replacement property and hold it until you sell your relinquished property. A Qualified Exchange Accommodation Agreement and all other documents are prepared by Independent Trustees. The EAT must borrow the funds necessary to purchase the replacement property, and you must guarantee this loan, or actually lend the funds yourself. When you sell your relinquished property, those proceeds are used to buy the replacement property from the EAT and pay off the loan. The EAT then transfers ownership of the limited liability company to you.
You have 45 days after the transfer of the replacement property to the EAT to identify the property you are going to sell. The same rules of identification mentioned above apply. Within 180 days after the transfer of the replacement property to the EAT, you must close on the sale of your property. In other words, the EAT cannot hold title to the replacement property longer than 180 days.
Because of the fees charged for this process, Independent Trustees does not recommend doing a reverse exchange unless your taxable gain will be at least $500,000.
NOTE: The content of this website is informational only. It does not constitute tax, legal or accounting advice. Each situation is different and you are advised to seek appropriate professional advice to see if a 1031 Exchange meets your needs.