How to Rescue a Multiple-Property Exchange

Sometimes an investor exchanging multiple Old Properties into a single New one can have timing issues if one of the sales falls through. For example: say an investor begins the 1031 exchange process by selling two Old Properties, but one of the sales falls through due to an inspection or mortgage loan issue. If this failure happens right before the New Property purchase date, it can cause major dilemmas.

But there’s a solution! To gain an extra 180 days to complete the sale of the Old Property you can set up a Reverse Exchange within a simple deferred exchange transaction, thus saving your exchange!

Back to our example: so our investor wants to sell the two Old Properties and purchase one New one. The first Old Property closes fine as the investor sets up the 1031 exchange. The second Old Property, for various reasons, doesn’t close, and now the investor has to put it back on the market. Meanwhile, the investor has a contract on the New Property and has to close it before the sale of their second Old Property. Now what?!

The investor can simply use the existing exchange funds to purchase a fractional share interest in the New Property and start a Reverse Exchange. They would then have the Exchange Accommodator purchase the rest of the New Property as an undivided fractional interest. The Exchange Accommodator sets up a Limited Liability Company to purchase and park the remaining fractional interest in the New Property. Additionally, the investor would be required to either borrow funds or provide their own to lend to this newly created LLC. Now with the simple exchange transaction completed, a new 180-day period begins from the date of the closing of the Reverse Exchange.

The investor would then need to sell their second Old Property within the new 180-day period. Once sold, the LLC sells their fractional interest of the Old Property back to the investor, with the investor’s exchange funds from the second Old Property sale used for the purchase. The exchange funds would now either pay back the investor note or pay down the amount borrowed from a lender. The exchanger is now the 100% owner of the new investment property, thus completing their Reverse 1031 Exchange and rescuing their investment!

...failure right before the purchase date can cause major dilemmas. But there’s a solution....!