Mid Atlantic Real Estate Journal — 1031 Exchange — March 15 - 28, 2013 — 19A


1031 E xchange

any Investors are increasing their real estate holdings be- By Stan Freeman, Exchange Strategies Corporation Better backwards? The advantages of Reverse §1031 Exchanges in today’s income property market M

to identify within 45 days of closing or the failure to acquire within the 180 day exchange period. At the very least, this deadline pressure tends to cause New Property acquisitions that are less than ideal for a particular Investor’s strategy. Once an Investor has decided to exchange, it is ownership of the desired New Property that is the goal of the Investor’s strategy and, in this market, the delayed exchange deadlines are frequently coun- ter-productive in achieving that goal. By contrast, if a reverse ex-

change is used, the Investor can take the time to find New Property that more precisely satisfies the desired profile and make the acquisition knowing that the goal has been accomplished without sacrificing the potential for a §1031 exchange with equal, if not greater, potential tax benefits. Furthermore, the Investor will then have a great deal more control as a seller in a seller’s market, a market that is likely to consume the Old Property pretty quickly. The second real advantage of reverse exchanges is their

ability to deliver much bet- ter ROI during the exchange period. In a delayed exchange, rental income is zero because the Old Property has been sold and the New Property has not yet been acquired. In a reverse exchange, the Investor receives the income from both properties during the exchange period and the dual rent stream nearly al- ways results in significantly better economic results. The idea – often perpetuated by other QIs – that a reverse exchange is more expensive than a delayed exchange is

almost always irrelevant or nonsensical. If a particular situation requires that the New Property be closed before the sale of the Old Property, then a comparison of fees is irrelevant. If the Investor has a choice, then it must be un- derstood that the income from delayed exchange deposits (i.e. interest earned) will go to the QI but the income in a reverse exchange will go to the Investor. Without considering the income generated by the assets, fee comparisons are pretty much nonsense. continued on page 26A

cause of suppressed ROI in other investment categories and this is creating intense competition for properties with good income characteristics and desirable locations. Even with the downward pressure on cap rates, income-producing real estate is and will remain a hyper-competitive category that requires Investors to have more effective tools to get the most from both available eq- uity and expended energy. With tax rates on the rise, the benefits of a successful §1031 exchange strategy are significant. Although it has always been true, it is now vividly clear that most Inves- tors contemplating exchanges involving income-producing properties would be better served by a reverse exchange than by a delayed exchange. The two primary reasons for this are increased transaction control and the superior ROI that can be achieved during the period that the exchange in is process. As all Investors know, in a delayed exchange, the Relin- quished (“Old”) Property is sold first and the cash is held by a QI until Replacement (“New”) Property is acquired. Simply put, a reverse exchange allows the purchase of the New Property to occur prior to the sale of the Old Property. Dur- ing a reverse exchange, the QI holds title to one of the proper- ties involved in the exchange until the Old Property is sold. However, the Investor retains financial responsibility and enjoys the income from both properties. Furthermore, the 45-day identification require- ment is satisfied using poten- tial Old Property to be sold (i.e. assets that the Investor already owns) and the 180-day deadline applies to the sale of one or more properly-identified pieces of Old Property. In today’s market, where many situations involve mul- tiple, all-cash, non-contingent offers for good properties and with the chronic potential for delays with Lenders, acquisi- tion timelines are a lot less predictable and manageable than in the past. Consequently, starting a delayed exchange without concrete knowledge of what will be acquired and when it will close means real risk of losing the exchange because of either the failure

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