By Lee David Medinets, Esq., Chief Counsel, MCRES and Senior Counsel, Madison Exchange, LLC a/k/a Madison 1031 and their affiliates
IRC §1031 like-kind exchanges are popular, reliable, IRS-approved transactions that allow taxpayers to defer paying taxes on profits when property (usually real estate) that is held for productive use in trade or business or for investment is exchanged for like-kind property (e.g., real estate exchanged for real estate) that will also be held for productive use in trade or business or for investment.
In a typical IRC §1031 exchange, the taxpayer sells relinquished property through a qualified intermediary (a “QI”) and later acquires replacement property through the same QI. If the process is handled in accordance with Treasury Regulations, it is considered as if the taxpayer exchanged the relinquished property for the replacement property. This process is commonly referred to as a “forward” exchange because it proceeds in the normal direction – sell first, buy second. However, sometimes a taxpayer needs to buy the replacement property before the relinquished property can be sold. This is called a “reverse exchange” because it proceeds in the opposite direction from a forward exchange.
A reverse exchange poses a special problem. The taxpayer cannot simultaneously own both the relinquished property and the replacement property. That would make it impossible to exchange one property for the other. Therefore, in a reverse exchange, either the relinquished property or the replacement property must be “parked” with some relatively friendly third-party until the relinquished property is sold. Continue reading