REVERSE EXCHANGE ROLLS INTO FORWARD EXCHANGE
Mary and Michael had an unusual situation. They had a firm contract
to sell their farm that was set to close on September 17, 2009 (we'll call
this transaction "S17"), but they were also under contract to buy a farm
with that closing set for July 26, 2009 ("J26"). A pretty clear-cut reverse
exchange situation, but there was a wrinkle.
The price of S17, the farm they were selling, was $1.6 million, and
the agreement on J26, the one they were buying, was only $700,000. They
fully intended to purchase additional property to use up the remainder
of the $1.6 million they would receive from their sale,
but they hadn't found any strong prospects yet. What we discussed, and
what Mary and Michael ultimately decided to do, was to structure a
reverse exchange for the closing of J26. Then, when S17 closed, we would
use $700,000 of the proceeds to wrap up the reverse portion of their
exchange. The remaining $900,000 would go into an exchange account for a
new forward (or standard) exchange.
One of the interesting things about combining a reverse and a forward
exchange is that there are separate timing deadlines for the two
exchanges. In this case, on September 17, the forward exchange started
with a deadline to identify potential replacement properties 45 days
later and a deadline to conclude the exchange 180 days after September
17. Mary and Michael used all of the
time from when they first completed their exchange documents with us in
early July to 45 days past September 17 to locate and put under contract
three outstanding rental homes in Arizona, all of which closed well
within the 180 day deadline. In this sort of combination reverse/forward exchange, if the
deadlines were stretched to their limits it is possible to have as much
as 360 days to complete an exchange!
The key to this or any other 1031 exchange transaction is proper
advance planning. We offer consultation at no cost whatsoever, so please
take advantage of that should you wish to investigate the pros and cons
of any sort of Section 1031 exchange situation.