REVERSE (DELAYED) EXCHANGE   

Here, the taxpayer acquires replacement property and transfers relinquished property within 180 days. This form has also been discouraged by the IRS in the past, but it is now accepted subject to the Regulations and Revenue Procedures published by the IRS.  It isn’t necessary for a taxpayer to find a trading partner who also expects nonrecognition treatment under Section 1031. Instead, the trading partner may turn around and sell property acquired from the taxpayer and pay capital gains on the sale. Or, the taxpayer may transfer relinquished property to a trading partner who has cash but no property for trade. Here the taxpayer locates and identifies replacement property, which the trading partner will purchase and cause deeded to the taxpayer. 

Why do an exchange?

 Here are some pros and cons:

PROS 

·         Defer Payment of Taxes-Indefinitely-Without Penalty or Interest 

   By doing a 1031 exchange a taxpayer may dispose of “property held for productive use in a trade or business or for investment” (we’ll call “income or investment property”) and acquire replacement income or investment property(ies) without recognition of capital gain in calculating the taxpayers income tax.

·         Make Government an Investment Partner 

By deferring payment of taxes, taxpayer has use of “the government’s money” to pursue personal income or investment goals

In sum, the 1031 exchange is an attractive vehicle for deferment of taxes, maximization of income and accumulation and wealth. This vehicle permits deferment of taxes until a later time, such as retirement, when the taxpayer may be lower tax rates, or after death, when taxes may be avoided by the “stepped-up basis” rule.

CONS 

·         Need Tax Advisor 

Each taxpayer’s decision to do or not to do a 1031 exchange must be made in the context of his or her investment goal overall estate plan. The decision must be made in light of the availability of suitable replacement property(ies). These decisions may be complicated, and require technical or legal or accounting expertise. Taxpayers are cautioned at attempting a 1031 exchange without the guidance of a knowledgeable tax advisor, such as a tax attorney or certified public accountant.

·         Must Follow Rules and Regulations and Meet Deadlines

Current 1031 exchange practices have evolved from federal statutes and court decisions, culminating in IRS Regulations. These Regulations were written to strike a balance between the competing interest of taxpayer and tax collector establishing procedures, deadlines and protocols which, if observed will cause the taxpayer’s transactions to enjoy “nonrecognition” or tax-deferred status with the IRS. 

·         Increased Costs of Transaction 

The taxpayer’s observance of IRS Regulations in connection with the 1031 exchange will involve transaction costs. In addition to a tax advisor, the taxpayer will need to retain an intermediary, an exchange accommodator and, in many cases, an appraiser.