C-Ojones, LLC

Reverse Exchange
A brief overview

What Is a Reverse Exchange
A reverse exchange is used when an investment property owner wants to buy the replacement property first before selling their existing property and have the completed transaction qualify under Internal Revenue Code Section 1031.

When To Do A Reverse Exchange
There are several uses for a reverse exchange here are a few common reasons:

	1.	The Property that you are interested in is unique and is only available for purchase now. The seller of that property is not willing to wait for you to sell your existing property.
		•	Example: The Smiths found the vacation house of their dreams. It was for sale but in order to maximize their tax benefits they would like to sell their existing rental and take that money and apply it to the purchase of this vacation house.

	2.	The property that you want is a deal of a lifetime. The price is right. The expenses involved are relatively small compare to the upside potential of the completed transaction.
		•	Example: Sam owns a mid-rise commercial building. His neighbor Joe is interested in selling his strip-mall at half the market value to Sam if he can complete the sale within 30 days. Sam does not want to keep his existing commercial building and would ideally like to sell it before buying Joe’s strip mall.

An owner of investment property wants to sell their existing property and do an exchange but does not want to worry about finding replacement property under any time restraints. With a reverse exchange the time periods don’t begin until the replacement property closes.

How To Do A Reverse Exchange

Step 1
The investment property owner enters into a contract to buy the replacement property the same way as is customary in their area.

Step 2
The seller of the replacement property is made aware that the sale of the property will involve a reserves exchange but that it will NOT delay the closing. A clause should be written into the contract stating:

"This contract is subject to a reverse exchange per Revenue Procedure 2000-37. Seller agrees to cooperate with this procedure at no cost to them"

Step 3
C-Ojones prepares the necessary agreements and creates an independent tax entity (usually a Limited Liability Company). The agreements assign the purchase contract to the new entity. This new entity will take title to the replacement property and close escrow.

Step 4
The new entity holds on to the property until the existing property is sold. The maximum time the new entity can hold the property is 180 days from the close of escrow on the replacement property.

Step 5
The existing property is sold and a simultaneous exchange occurs between the investment property owner and the new entity. This completes the exchange process

What Are The Costs Involved?
C-Ojones charges a flat fee of $6,500 that is all-inclusive. This fee includes:
• Formation and registration of the separate entity
• All accounting and tax fillings involved with the entity
• Access to on-staff CPA’s and Licensed Tax Attorneys
• Preparation of all necessary documentation
• $5 million dollar fidelity bond

Financing Issues
Funds to close the transaction can come from various sources such as:
1. Cash savings
2. Cash advances on credit lines
3. Direct lending where the guarantor of the note is the investment property owner

Who Is C-Ojones
C-Ojones is a division of Urban Investment Trust a $1.5 Billion dollar real estate concern based in Chicago Illinois. C-Ojones has over 2 decades of experience in doing reverse exchanges throughout the nation. Each of our offices is staffed with licensed CPA’s, Tax attorneys and experienced exchange officers to provide you with peace of mind and an efficient transaction.

You are cordially invited to call our office Toll Free 888-516-2396 and ask as many questions as you want about this exciting program there is never a cost or obligation.

The Reverse Exchange Procedures
On September 15, 2000 the Internal Revenue Service released Revenue Procedure 2000-37 which provides a safe harbor guideline for doing reverse exchanges.

In order to follow these new procedures Reverse exchanges must comply with the following provisions:

1. The property must be held by a separate entity who is not the taxpayer or a disqualified person and who is subject to federal income tax.

2. The taxpayer must have the intent that the property be held as either replacement or relinquished property in a qualifying exchange.

3. Within 5 days after the transfer of the property to the separate entity a written agreement must be entered into.

4. 45 days after the transfer of the replacement property to the separate entity the relinquished property is properly identified.

5. No latter than 180 days after the transfer of the property to the separate entity the property is transferred to the taxpayer.

The information described above is simply a brief overview of the new provisions and is not intended to provide a complete or comprehensive coverage of the revenue procedures. All taxpayers should consult with their tax and legal advisors regarding their particular circumstances.

Reverse Mortgage