In simple terms, a reverse exchange is a 1031 exchange where the replacement property is purchased before the original investment property is sold. But they aren’t quite as simple as a 1031 exchange. It should be said before anything else, find a qualified intermediary (QI) before beginning the process.
1. Financing can be a hassle if you are in need of funds for the purchase until you sell. In a reverse, the QI takes title to the new property in the EAT (Exchange Accommodating Title holder). So the loan has to be made to the EAT but guaranteed by you.
2. The Reverse is relatively expensive because a holding company must be created to hold the replacement property until the exchange is complete.
Because of its complexity, taking some time with your QI to get fully educated on the nuances of the reverse will be well worth your while. It is always wise to check with your tax expert before making any moves towards a 1031.