Forward exchanges are often referred to as a “delayed exchange.” However, this can be somewhat of a misnomer because the exchange can be delayed several months, or can happen on the same day if it is structured accordingly.
Selling your Property – the “First Leg”
In a forward exchange, the sales contract on the relinquished property is assigned to us before closing. At closing, the buyer receives title to the property, and we receive the 1031 funds directly from the closing escrow agent. This is often called the “first leg” of the transaction.
Investment of Your 1031 Funds
We will hold the funds until the replacement property is ready for purchase. Your exchange funds are held in an FDIC insured bank account, and may be invested at your request. Your account will be titled in our name for your benefit.
Purchasing your New Property – the “Second Leg”
In the “second leg” of the 1031 transaction, the purchase agreement is assigned to us before closing. We coordinate with the closing escrow agent and keep you informed at every step along the way. We will wire your exchange funds directly to the title company to purchase the replacement property, then the title to the property is transferred directly to you. This transfer is often referred to as “direct deeding.”
At the end of the transaction, we will give you a complete file with all the relevant legal documentation so that you and your accounting professional can have the information necessary to report and document the exchange to the IRS – right at your fingertips.
In a reverse exchange, the second part of the transaction occurs before the first part. The Exchanger purchases their replacement property before they sell their relinquished property. Instead of holding exchange funds, we hold legal title to the property for you. 1031 experts refer to this as the “Exchange Accommodation Title Holder” abbreviated “EAT” or “EATH.”
Creating the Proper Legal Structure for your “Reverse” Exchange
The first step of a Reverse Exchange to create the proper legal entity structure for the exchange. We help you or your legal counsel form a single purpose entity to purchase your replacement property. The EAT will be sole member of the entity. Instead of holding your exchange funds, we hold title to your replacement property while you sell your relinquished property as an “accommodation title holder.” We will also provide all legal documents necessary to meet the requirements of an accommodation title holder. The title and any owner’s title insurance on the property will be held by the single purpose entity; however, you will act as the signer on any funding required for the purchase. Some lenders are not familiar with this arrangement, and it is important that you pick an intermediary that understands the legal issues well enough to work with the lender’s counsel. Our attorneys can work with your lender in a seamless manner to make sure that any requested or additional documentation satisfies both the lender requirements and the IRS regulations and guidelines.
45 Day Identification Period
Reverse exchanges often make the identification process easier than a forward exchange. You still have 45 days to identify which property you will sell, starting the day you close your replacement property purchase. Most people choose to structure a reverse exchange for one benefit: they can guarantee plenty of time to find their perfect replacement property, and are not rushed into a rash decision for the sake of saving the exchange. This takes the confusion out of the identification process, but you must identify your relinquished property (or properties) within the identification period.
Sale of Property
Once you are ready to sell your relinquished property, we structure a forward exchange on the sale property. We receive exchange funds, then use your exchange funds to purchase the membership interests of the special purpose entity on your behalf and at your direction.
Because there are so many legal documents and parts involved with a reverse exchange, it is very important to work with an intermediary who understands the legal implications of contracts and corporate documents. We have multiple attorneys on staff, and you will work with an attorney directly to handle your exchange. Contact GPX regarding your next exchange transaction and rest safely in our hands.