1031 Exchange Guidelines

Real Estate investors may opt for a forward or reverse exchange depending on their situation. In a forward exchange the investor has 45 days from the close of escrow on his/her property (the relinquished property) to identify a replacement property(s). The replacement property(s) must be of equal or greater value in order for full tax-deferral to be recognized. The investor then has 180 days from the close of escrow of the relinquished property to acquire the replacement property(s).

For some investors a reverse exchange may be more appropriate for their particular situation. Reverse exchanges were first allowed under Revenue Procedure 2000-37. In a reverse exchange the deadlines are reversed. The investor may obtain a new property(s) first and then dispose of the relinquished assets, with less time contraints. The investor has 45 days to declare which property is to be relinquished and 180 days to sell that relinquished property in order for tax-deferral to be recognized.

Reverse exchanges may be more advantageous for investors in that it is usually easier to sell a propety than to buy. However, before executing a reverse exchange, the investor must have enough capital in order to purchase the replacement property, without the relinquished property(s) funds. Also reverse exchanges are usually more technical than forward exchanges and require careful structuring and establishment of a special purpose entity (SPE) to facilitate the transaction.