1031 Exchange vs. Reverse 1031 Exchange – What’s the Difference, and How to Avoid the Expensive One As the market shifts, I’m starting to see a familiar pattern: Investor clients are coming out of the woodwork, getting bored, and itching for their next project. Action cures boredom, and for many investors, that means buying again. When that “can’t-miss” property pops up, the conversation often turns to 1031 exchanges. More specifically, whether a standard 1031 will work… or whether a reverse 1031 exchange is required. Let’s break down how both work, what they cost, and how to plan so your clients don’t get forced into the expensive option. How a Traditional (Forward) 1031 Exchange Works A 1031 exchange allows an investor to sell an investment property and reinvest the proceeds into a new investment property while deferring capital gains taxes. The basic steps: Sell the relinquished property Sale proceeds go to a Qualified Intermediary (QI), not the investor The investor has: 45 days to identify replacement property(s) 180 days to close on the replacement All proceeds are rolled into the new property to maintain full tax deferral Financing on a standard 1031: You receive standard investment property loan options Rates and terms are comparable to standard investor financing No special entity or “parking” structure required Bottom line: A forward 1031 is clean, efficient, and financing is straightforward. How a Reverse 1031 Exchange Works A reverse 1031 exchange is used when the investor buys the replacement property first, before selling the existing property. Because the IRS does not allow an investor to own both properties at the same time under a 1031 exchange, the structure becomes more complex. The basic steps: A special entity (often called an Exchange Accommodation Titleholder, or EAT) is created The EAT (corporation) takes title to the new property The investor then sells their current property Once the sale is complete, the replacement property is transferred to the investor Why is financing more expensive? The corporation is technically buying the property Loans are short-term, specialized, and risk-priced Current reality: Rates around 10.99% Points (3-4) are typically required Additional legal and exchange costs apply Important note: It’s not just the exchange fee that hurts; it’s the loan costs and rate that make reverse 1031s painful. Plus, once you buy the property, you’ll have to pay the seller’s and buyer’s fees again! This is why avoiding a reverse 1031 whenever possible is usually the most brilliant move. How to Avoid a Reverse 1031 (or At Least Minimize the Damage) Sometimes the perfect deal pops up - and waiting isn’t an option. That’s where strategy and foresight matter. Negotiate a Longer Escrow on the New Purchase A longer escrow gives time to sell the existing property first Eliminates the need for immediate replacement ownership Remove Contingencies to Stay Competitive A firm, clean offer can win without rushing into a reverse exchange No sale contingency doesn’t automatically mean reverse 1031; it just means planning Have a Reverse 1031 Lined Up as a Fallback Set it up as a Plan B, not Plan A If the sale doesn’t happen in time, the reverse structure is already in place This protects the deal without committing to the higher-cost loan unless necessary Adjust the Price on the Property Being Sold Slightly lowering the sale price can: Speed up the sale Allow the investor to qualify for much better long-term financing This is often smarter than paying: Higher rates Points Corporate loan fees Refinance or second Mortgage – Have the client refinance or get a second mortgage on the property they want to sell and make it a clean purchase and kick the 1031 down the road when they can do a forward 1031 exchange transaction! A reverse 1031 Exchange has its place, but I have seen many deals blow up once we get past the first steps. Setting your client up to win is a great start and having someone who knows the ins and outs of every loan product is a good place to start! Please let me know if you have any questions or if you or any of your clients, friends, or family members need my guidance. I’m just a call, text, or email away. 📞 Direct Line: 661-291-2222 – Text OK 📞 Cell: 661-714-6258 – Text OK 📞 Office: 661-260-2970 ext. 2222 – Text OK 📧 Email: Mike@AugustaFinancial.com But wait, there’s more… Interest Rates Interest rates are a little higher today, and that’s just how it is! Rates are at their best levels in a year or so, and many are in the 5’s; you can get to the 4’s if you buy it down. I don’t know how exciting this is, but we are getting closer, and we still have a ways to go to get us in the 4’s with no points! Loan Programs We do loans on Non-warrantable condos! We offer 12-day escrows for pre-approved buyers, including conventional, FHA/Jumbo/Bridge loans. We provide loans in all 50 states, so call me with anything you need. Government loans (FHA/VA/USDA) are in the 5s. Conventional loans up to $832,750 are in the high 5’s and low 6s. High-balance loans from $832,751 to $1,249,125 are also in the 6s. Jumbo loans above $1,249,125 are in the 6’s. ARMS in the 5’s and some in the 6’s Bank statement loans are available again with 10% down, with larger down payments in the 6’s++. Profit and Loss Statement loans require 20% down - no bank statements needed, only a profit and loss statement! 0 down loans are available in the high 6s, with a minimum credit score of 620, up to $1,325,000. Private Money lenders offer Hard Money Loans with 35% down. No-Ratio Loans require a 30% down payment. DSCR (Debt Service Coverage Ratio) loans are available with as little as 15% down. Bridge Loans typically have an interest rate of 7.99% with limited fees, helping you get where you need to go! 3/2/1 Buydowns, 2/1 Buydowns, and 1/0 Buydowns are available at great starting rates! Please note that interest rates are subject to change without notice, and the information above reflects LA County Loan Limits. **Good News for Condos:** Nada today! **Bad News for Condos*** Nothing today! CONDO HELP!!! If you have a listing or a buyer interested in a specific condo and are unsure whether it is warrantable or Non-warrantable, please call me, and we can look up Fannie’s list in real-time. We don’t know when something has changed, and it would be impossible to track everything day by day, but we don’t mind looking up a few items each day. The full state of California’s naughty list has been added to: MikeMeena.com! See the link below: https://mikemeena.com/non-warrantable-condos/ Let me know if you hear anything new about condos or townhouses. I am available every day if you need anything. 📞 Direct Line: 661-291-2222 – Text OK 📞 Cell: 661-714-6258 – Text OK 📞 Office: 661-260-2970 ext. 2222 – Text OK 📧 Email: Mike@AugustaFinancial.com Have a great day and an even better tomorrow! Please call me when you have a client who needs to borrow! Mike Meena President | Loan Officer Click to Call or Text: (661) 714-6258 This entry has 0 replies Comments are closed.
