Q. What is a Reverse 1031 Tax Deferred Exchange? A. Quite simply, its is the acquisition of the replacement property(s) prior to the sale of the relinquished property(s).

Excerpts from articles by T.G. Exchange, Inc.; Old Republic Exchange; Exchanging.Com, Inc. and Professional Exchange Accommodators, LLC

As an investor or advisor, you will sometimes encounter situations where this exchanging strategy will work best for you or your client.

Although it involves a little more planning, the results are well worth some additional discussion.

For a moment let's assume you are an owner of investment property. Can you imagine being primed to acquire an exchange replacement property but feeling hesitant because your listed property hasn't yet sold?

Well, with the unpredictable market we often experience, this is a scenario which has become common for many investors. Its also a dilemma which can have a very negative effect on more than investment income.

However, a solution exists for many investors. This solution involves the use of a corporate buyer who can bridge the gap between the listing and sale of your exchange property. This alternative works well because after all, you could purchase the replacement property if you had a buyer for your exchange property.

Although this vehicle has been used effectively for several years it is just now gaining in popularity. This tool, which we will refer to as a reverse exchange, can many times not only save a purchase opportunity, but also ensure a more orderly and streamlined exchange process.

Now in order to keep this page somewhat brief we will not belabor the entire subject of reverses, but rather, we would like to introduce you to the overall reverse concept and if possible isolate the situations where they may work best. This is because reverses can get complicated, but the most important aspect of reverses for you as an investor, is to understand where they might be appropriate, as opposed to knowing every in and out of the logistics of a reverse.

Before continuing with the detailed specifics of a reverse exchange let's go back and make sure we understand the traditional and basic concepts which underlie all exchanges.

Tax deferred exchanges, as defined in Section 1031 of the Internal Revenue Code, establish the parameters for the sale and purchase of qualifying investment property for the purpose of deferring taxes on any capital gain. The idea behind the exchange is to simply transfer equity from one property to another and thereby avoid a taxable event, as would be found in a traditional sale and repurchase.

Although reverse exchanges were specifically excepted from the 1991 Treasury Regulations (remember those are the guidelines for all tax deferred exchanges), they have recently been approved, as of the date of distribution of a new Revenue Procedure issued September 15, 2000.

Due to the fact that reverse exchanges are more complicated than typical simultaneous or delayed transactions, they require extensive and comprehensive planning. This is necessary to properly structure the property transfers, balance the equities and streamline the entire transaction.

However, as was mentioned earlier, even if space is not available to describe the process in depth, we can identify the two main reasons reverses work so well for many investors.

The first key element is the exchangor's ability to acquire the perfect target property for his investment needs.

Many times a reverse exchange will be in order simply because the exchangor is so motivated to purchase a particular target property.

Due to the fact that the time related rules for delayed exchanges can now apply to reverse exchange situations, the exchangor has considerable flexibility over a simultaneous exchange in the time and logistics available to complete his transaction.

Hence, this allows the necessary time to successfully market and sell the relinquished property within the applicable 180 days.

So it is obvious that reverse exchanges can be of great benefit to many exchangors. They can solve many problems if structured correctly and create many opportunities for advisors to solve potential problems for their clients.

Let's spend just a second on facilitators.

In any reverse exchange situation the selection of a capable facilitator is critical. Reverses demand the need for a facilitator who demonstrates an appropriate background as well as direct experience with reverse transactions.

Before commencing a reverse exchange, secure a facilitator who has arranged and assisted numerous reverses.

Due to the inherent legal exposure when holding title to property during the warehousing term, not all exchange facilitators are equipped to facilitate reverse exchanges.

Finally, fees for reverse exchanges can vary widely between facilitators capable of completing a qualified reverse.

The key ingredient then, as in all exchanges, is the thoughtful planning and identification of the needs and goals of the investor. Please, do not undertake a reverse exchange without the assistance of an experienced and knowledgeable facilitator or intermediary.

This information, though believed to be accurate, should not be relied upon without verification by consulting a tax professional.

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