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This situation is called a
reverse exchange. If at all possible, it is better
for you to sell 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 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 $1/2 million. |
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