Everyone knows a section 1031 exchange will allow you to defer the federal gain as well as the depreciation recapture on the sale and subsequent purchase of property held for investment or business use.  Depending on the state, you may also be able to defer the state gain.  Generally, to maximize the deferral, you must acquire replacement property of equal or greater value and equity but what happens if the relinquished property is underwater? 

1031 CORP. has long facilitated exchange transactions that involved no equity and some even required the Exchanger to bring funds to closing.  Some would ask why you might want to do this.  Unfortunately, the equity or net cash after mortgage payoff has nothing to do with the gain on a property.  The gain is calculated by subtracting the net selling price from the original purchase price including closing costs and capital improvements.  The equity is the difference between the fair market value of the property and how much money you owe your mortgage lender.

How times have changed in the last twelve months. We have watched the real estate market make an about face and is now a seller's market. This is causing buyers to act fast once they find the property they want and they are up against other potential buyers offering more than the asking price and willing to close soon. Putting a contingency that your old property must close first is not as easy now as it was just a few months ago.

This has helped increase the use of reverse exchanges over the last twelve months as exchangers strive to get their desired property while preserving their ability to defer the gain.

What Is A Reverse Exchange?