“Once the relinquished property is sold, the proceeds go to the EA just like in a normal forward exchange. The EA uses the proceeds to repay the loan from the client and transfers the interest to the client,” Vanden Bosch said.
EA fees for reverse 1031s tend to be higher than those for forward 1031s, he added.
Analysis of any cost-recovery/depreciation related to the transactions is key, Trifilo said, as are any improvements needed to the replacement property. “Ensuring that the taxpayer doesn’t hold title to both properties at the same time is also important,” he added.
Forty-five days to find a property to sell can obviously be easier than finding one to buy in that same time, Torhan added, though “the 180-day requirement to close on the sale of the property may create pressure. The taxpayer must find a qualified buyer, negotiate an acceptable sales price and close on the sale transaction.”
Other considerations include financing for the replacement property that’s acquired at the beginning of the reverse 1031, as the titleholder will be named the borrower on any loan, and the taxpayer’s inability to claim depreciation on the property while the property is owned by the titleholder.
As with forward 1031 exchanges, taxable gain could still be generated in several ways, Torhan said. The receipt of cash or mortgage boot (aka the cash or value of the non-like-kind property) could generate gain. Since non-recognition treatment now only applies to real property, gain could also occur if certain types of non-real property, such as personal property, is included in the exchange. “There are certain exceptions for incidental personal property,” Torhan said.
Recently there’s also been legislative pushback against the tax benefit of 1031s in general, Rabasca said, adding that the break “may come under congressional attack again in the future.”