When to Use a Reverse 1031 Loan
Reverse 1031 loans allow a real estate investor to finance the purchase of a replacement property prior to selling their existing investment property. A real estate investor may opt to do a reverse 1031 exchange as opposed to a traditional 1031 exchange to ensure they can secure a new suitable property prior to selling the relinquished property. Selling an existing property and then not being able to acquire a new replacement property within the allowed timeframe determined by the IRS can result in having to pay unnecessary capital gains taxes. Reverse 1031 loans provide the real estate investor with fast and reliable financing to quickly secure the new property. Traditional 1031 exchange loans are also available and provide similar benefits.
A reverse 1031 exchange loan is written with the qualified intermediary (QI ) as the borrower since the QI is technically taking ownership of the replacement property initially. The replacement property will later be transferred to the real estate investor from the QI. The reverse 1031 exchange loan will stay attached to the property when it transfers. The real estate investor will be able to refinance into a long-term conventional loan once it transfers which will pay off the short-term reverse 1031 loan.
The added complexity of having the QI as the borrower for the reverse 1031 exchange loan is something that prevents most lenders from being able provide this specialized type of financing. The reverse 1031 exchange financing provides fast lending to quickly secure the new property. Reverse 1031 exchange financing from an experienced private lender can be completed in as few as 5-7 days.
How to Qualify for a Reverse 1031 Loan
To qualify for a reverse 1031 loan the real estate investor must have a down payment of at least 25-30% of the purchase price of the replacement property. If the investor doesn’t currently have cash available for a down payment, they may be able to take out a loan against their current property in order to raise the necessary funds. A new 1st loan or a 2nd loan may be available depending on the existing equity within the property and the amount needed for the down payment.
The real estate investor will also need to demonstrate that they will be able to refinance the short-term reverse 1031 loan into a long-term conventional loan in the near future. A basic financial statement and credit information would be required to ensure the investor has the necessary financial strength.