Expert Danielle Brock of 1031 Corp Explains How Reverse 1031 Exchanges Work – House Talk Episode 47
Karen Malanga: Hi, this is Karen Malanga with an edition of House Talk.
And I’m so excited to have Danielle Brock back from 1031 Corp here in Bend. She’s an exchange officer. And the reason I’m having her today is because I actually have a transaction in place where my clients are doing a reverse 1031 exchange. They didn’t know it existed. I knew it existed, but I didn’t know much about it. So I sent them to Danielle.
So Danielle, welcome to the program. And if you could just explain to our listeners what is a reverse 1031.
Danielle Brock: Sure! Thanks for having me, Karen. So a reversed 1031 exchange is a situation that a taxpayer may find themselves in where they need to acquire their replacement property through an exchange before they’ve had the opportunity to sell their relinquished property, and they want to preserve the right to still perform a tax-deferred exchange.
And so, in that situation, we are able to set up what we call an exchange accommodation titleholder, which in the case of our company is a limited liability company that is wholly owned by us. The exchanger is not a member of that. And we borrow the funds from the exchange client and/or their lender to acquire title to the property that they wish to eventually purchase, and hold it for them.
We then enter into a qualified exchange arrangement which says that within 180 days, we will transfer title to that property to them. So they’ve got 180 days now to get their property sold, so that they can do the 1031 exchange and purchase that ultimate replacement property from us.
Karen: And when does 180 days start? Does it start when they close on the property that they’re going to be purchasing?
Danielle: Yes. So, when our exchange accommodation titleholder takes title to that that property that they desire to own eventually, the 180 days starts at that date.
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Karen: I am so glad that you are in charge of this. I know real estate contracts, but this sounds a little complex. Are there extra fees in a reverse 1031?
Danielle: There are. The fees are quite a bit higher. Our standard exchange fee for just a typical 1031 transaction starts at $900. Nine hundred dollars is what most of our exchanges are.
A reverse exchange adds $3500 to that cost. So it’s substantially higher. However, there’s a whole host of reasons that it still may make sense for the client. If they just found a great deal on a property (which is harder and harder to come by these days) or if they’ve just found exactly what they want (I mean, we are really getting many more inquiries about reverse exchanges right now just because of the pace of the market), people are afraid if they do a standard exchange that they won’t be able to find what they want within 45 days. And so it’s worth it to them to go out and tie up what they want, and then sell their property.
Karen: Well, also, if you’re looking at, basically, that’s like $4400 compared to what could capital gains be on a sale that’s $600. I mean, it’s still going to be a huge savings to most people.
Danielle: True! And I always tell people to consult with their CPA and really determine what is the basis on the property that they’re selling, how much will their taxes be if they didn’t do an exchange, so that they can do that cost analysis.
Karen: Oh, Danielle, thank you for being here today. How does someone find you to learn more about a reverse 1031 exchange?
Danielle: Sure! You can reach me by phone at 1800-388-1031 or 541-388-1031. I could also be reached by e-mail. That’s Danielle@1031Corp.com.
Karen: Thank you so much for being here. We’re going to have to have you back because this is a little complex.
Danielle: I would be happy to be back.
Karen: Thank you.