A real estate exchange under section 1031 of the IRS code is governed by strict guidelines that control how taxpayers may sell one property and defer taxes by acquiring another “replacement” property.

In most 1031 exchanges, referred to as “delayed” or “forward” exchanges, the taxpayer must identify the like kind replacement property within 45 days after the close of escrow on the relinquished property.

However, there is another type of 1031 exchange, called the “reverse” exchange, in which the taxpayer is allowed to acquire their replacement property before selling the relinquished property.

A reverse 1031 exchange is a tax deferred, like kind exchange that is especially useful in markets where the inventory of properties is low.

The taxpayer must complete the reverse exchange within 180 days after purchasing and “parking” the replacement property with an Exchange Accommodation Titleholder (EAT).

A reverse 1031 exchange can save you thousands of dollars in capital gains tax, but the legal requirements are very complex. Sellers wishing to make this kind of tax-deferred exchange should consult with an experienced real estate agent and tax attorney before proceeding.