Reverse & Improvement Exchange Financing

Reverse 1031 exchanges involve the purchase of Replacement Property prior to the sale of the property being sold (the Relinquished Property) in a like kind exchange. Since you are not able to own a Replacement Property prior to selling a Relinquished Property, a taxpayer arranges for an Exchange Accommodation Titleholder (EAT) (usually the Qualified Intermediary) to take and hold title to replacement property until they find a buyer for his or her relinquished property.

Reverse Exchanges are also common where a taxpayer wants to acquire a property and construct improvements (an (Improvement Exchange) on it before taking title to the property as replacement property for an exchange. This is necessary if the value of the improvements is important for replacing with property of equal or greater value in order to avoid a taxable “trade-down.”

One question that naturally arises is the financing of the Replacement Property. Since the taxpayer's equity is tied up in the property not yet sold, how does one go about financing the purchase of the Replacement Property? Having the Qualified Intermediary (and EAT) owned by a bank helps....a lot.

See, the trouble is, the property is not in your name yet. So, secondary financing providers have issue with lending to an entity that isn't signing on the loan. If you want to finance 100% of the purchase price and wait to pay the loan down and amortize the loan after your relinquished property sells, most lenders are going to say it is impossible. Further, what happens when the property sells. The proceeds from that sale can't be assigned to the loan since they need to go to the Qualified Intermediary for 1031 exchange purposes.

1031 Corporation has the answers to these questions. As a bank-owned Qualified Intermediary, we can assist with Reverse and Improvement Exchange Financing through FirstBank's 130+ office locations throughout Colorado, Arizona and California. Since we are owned by a bank, we are very familiar with reverse exchange financing issues and can work with our bank officers. Having a Qualified Intermediary subsidiary, the bank officers are familiar with the terms and conditions of Reverse Exchange Financing and can work with you to provide this "bridge" in financing. In fact, FirstBank has a program that allows for long-term commercial financing at the time of Replacement property purchase. They even include a one-time assumption of the loan and waive any prepayment penalty for the Relinquished Property sale proceeds.

Call us today at 888-367-1031 if you are working through the mechanics of Reverse Exchange Financing or if you are having difficulty financing the purchase of your 1031 Exchange Replacement Property. We are uniquely positioned to assist you and would be happy to help expain the process in detail.