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With a typical 1031 exchange, you can sell your investment property without paying taxes when you purchase another investment property of equal or greater value. But, there's a hitch - you must sell your old property before you buy your new property within a strict 180-day time frame - in order to qualify for a 1031 exchange.

What happens if you need or want to purchase the new property before selling the old property? For example, you run into a delay on the sale of your old property or you want to take advantage of a down market to invest in foreclosed properties while you're waiting for the market to ramp back up - but you're not ready to sell your current property's? This is where the reverse 1031 exchange comes in.

...Sophisticated investors are using reverse exchanges to make purchases now, when the market is slow and prices are low...

To refinance or not to refinance: this is the common question many 1031 exchangers ask. By refinancing, exchangers are usually hoping to pull money (cash) out of their sale transaction to use for purposes other than investing in new 1031 property.

To answer the question, we need to understand the timing of the refinance. Based on the whether you, the taxpayer, are pulling money from the old, relinquished property or from the new, replacement property, the IRS has varying positions.

When refinancing the old property, a key 1031 exchange requirement drives the IRS’ position. The taxpayer cannot receive, touch or control the funds generated from the sale of the old property during the period until the purchase of the new property. Does refinancing the old property right before the exchange constitute “receiving money”?

Security is the big issue for those investors doing 1031 exchanges. There have been a lot of stories in the news lately about intermediaries who’ve taken their clients’ exchange funds. All of the bad things that happen with exchange accounts stem from commingled accounts, rather than separate exchange accounts. Yet few intermediaries place each exchange client’s money in a separate account for them; commingling is the industry standard.

When “commingling,” all of the exchange funds are placed in a single account rather than in a series of multiple, or “separate,” accounts set up for each client. The primary reason that intermediaries commingle is to maximize their personal return on your money – they earn a large return and pay you a small portion of it. With a separate account you get all the earnings from the account.