Requirements

• In order for your property to qualify for a reverse 1031 exchange the following must be true:

1. Both the Relinquished Property and the Replacement Property must be held either for investment or for productive use in a trade or business. You must intend to hold for investment for at least one year. This means that you cannot live in the property the Exchangor is acquiring in the 1031 exchange.
   
2. The property must be Like Kind Property. Real property must be 1031 exchanged for real property. Personal property must be 1031 exchanged for personal property.
   
3. There must be an actual reciprocal transfer of properties - a deed for a deed.

Procedures

Two Methods To Accomplish a 1031 Reverse Exchange

Basically two methods can be used to accomplish a reverse 1031 exchange. The first method is accomplished by a special purpose entity designated by and affiliated with the Accommodator holding title to the Relinquished Property. 

The second method is accomplished by a special purpose entity designated by and affiliated with the Accommodator purchasing and holding title to the Replacement Property.

Method One - Holding Title to Relinquished Property

Conveyance of Relinquished Property To Special Purpose Entity

• Exchangor provides Downstream with a copy of the deed or title report for the relinquished property.

 
• Downstream has a deed prepared transferring title from the Exchangor to the special purpose entity designated by and affiliated with Downstream.

 
• Title to the relinquished property is now held by the special purpose entity.

 

Conveyance of Replacement Property to Exchangor

• The escrow company handling the escrow for the Replacement Property sends the Accommodator, Downstream Exchange Company, Escrow Instructions and the Preliminary Title Report.
   
• From that information, Downstream prepares an Amendment to Escrow Instructions - Exchange of Replacement Property. These documents are returned to escrow to obtain your signatures as the Exchangor and the signature of the Seller. 
   
• Since the Relinquished Property has not been sold, the Exchangor has to lend the special purpose entity sufficient funds to acquire the Replacement Property. 
   
• The Replacement Property that you acquire must be property you intend to hold for investment for at least one year. This means that you cannot live in the Replacement Property.
  

Sale of Relinquished Property By Special Purpose Entity

• The escrow company handling the escrow for the Relinquished Property sends the Accommodator Downstream Exchange Company, Escrow Instructions and the Preliminary Title Report.
   
• From that information Downstream prepares an 1031 Exchange Agreement and an Amendment to Escrow Instructions - Exchange of Relinquished Property. These documents are returned to escrow to obtain the signatures of you, the Exchangor, the Special Purpose Entity, and the Buyer. 
   
• After the sale of the Relinquished Property has closed and the proceeds have been wired to the Special Purpose Entity, the Special Purpose Entity repays the Exchangor the funds originally lent to the Special Purpose Entity to acquire the Replacement Property.
  

Method Two - Holding Title to Replacement Property

Conveyance of Replacement Property to Special Purpose Entity

• The escrow company handling the escrow for the Replacement Property sends the Accommodator Downstream Exchange Company, Escrow Instructions and the Preliminary Title Report.
   
• From that information, Downstream prepares an 1031 Exchange Agreement and an Amendment to Escrow Instructions - Exchange of Replacement Property. These documents are returned to escrow to obtain your signatures as the Exchangor and the signature of the Seller. 
   
• Since the Relinquished Property has not been sold, the Exchangor has to lend the special purpose entity sufficient funds to acquire the Replacement Property. 
   
• The Replacement Property is deeded to a Special Purpose Entity designated and affiliated with Downstream Exchange Company. 
   
• The Replacement Property that is acquired by the Special Purpose Entity must be property you intend to hold for investment for at least one year. This means that you cannot acquire a principal residence as a Replacement Property.
   
• When the Replacement Property has been deeded to the Special Purpose Entity you will receive a letter from Downstream advising you of the date of the deed and a calculation of the 180th calendar day by which you must sell your Relinquished Property.
   
• The Special Purpose Entity will lease the Replacement Property to you, the Exchangor. 

Conveyance of Relinquished Property From Seller To Buyer

• The escrow company handling the escrow for the Relinquished Property sends the Accommodator, Downstream Exchange Company, Escrow Instructions and the Preliminary Title Report.
   
• From that information Downstream prepares an Amendment to Escrow Instructions - Exchange of Relinquished Property . These documents are returned to escrow to obtain the signatures of you, the Exchangor, and the Buyer.
   
• The Relinquished Property  is deeded to the Buyer. 
   
• Escrow on the Relinquished Property  must close no later than 180 calendar days after it has been deeded to the Special Purpose Entity. 
   
• After the sale of the Relinquished Property  has closed and the proceeds have been wired to the Special Purpose Entity, the Special Purpose Entity repays the Exchangor the funds originally lent to the Special Purpose Entity to acquire the Replacement Property.

Conveyance Of Replacement Property By Special Purpose Entity To Exchangor

• Pursuant to the 1031 Exchange Agreement, the Replacement Property is deeded by the Special Purpose Entity to the Exchangor.

Practical Considerations

• You need to have sufficient funds to acquire the Replacement Property.
   
• You may incur additional state, county or local transfer taxes when the Replacement Property  is conveyed from the Seller to the Special Purpose Entity. 
   
• You have only 180 calendar days from the date that either the Replacement Property or Relinquished Property deeded to the Special Purpose Entity to complete the exchange. 
   
• Institutional lenders generally will not make loans to the Special Purpose Entity to acquire the Replacement Property even if the Exchangor guarantees the loan.  If this is the case, then the only method available to accomplish the reverse exchange is Method One - Holding Title to the Relinquished Property.