REVERSE EXCHANGE ROLLS INTO FORWARD EXCHANGE

Apr 2010

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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 $1.6iowa 1031 exchange 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.