Posted in Finance, Accounting and Economics Terms, Total Reads: 128
Definition: Reverse Exchange
Reverse Exchange is process of buying a new property and selling the old one in exchange for getting tax deferment. It is opposite of like kind property exchange system under which the old property had to be sold first and then a new one can be brought.
Any property exchanges for personal or business investments are considered under this exchange.
This exchange is beneficial for the investor because
• This allows the investor to buy a new property today and sell the older one later. So he can get the new property at right time and right amount.
• Helps in diversifying the property with time.
• It also helps the investor in postponing the tax burden.
• The investor can benefit sometimes as he gets more time of about 45-180 days to sell his older property.
But this exchange has to be done within the specified time period as mentioned under the act of 1031 reverse exchange.
Here during the exchange period, the investor cannot become owner of both the properties so a third party is involved under section 1031 of IRC called Exchange Accommodator Titleholder (EAT) which comes in and either the old or new property is held by it until the exchange is completed.
The investor has to notify to this third party for participating in such exchange.
The disadvantage of such exchange is:
• The investor needs to have money to buy new property without raising the money by selling the old property .So only financially abled investors can enter into such contract.
• The ownership of the old property/new property does not remain with the investor even though the property has not yet been sold. So its asset value decreases even though no amount has been received in return.
• A limited time period of maximum 180 days to sell of the property.