This is the same as a construction exchange, except that you are going to buy the new property before you sell the old one, and start on the construction right away. This is desirable when you know construction will take well over 180 days to equalize and complete. You purchase the new property with the QI as the EAT, then start on construction and build to a point where you are able to close on your old one, and then utilize the funds from the sale to pay back for the funds used during construction. In addition, you try to time the closing on the old property to coincide to day 180 of when construction will be done or equalized on the new property you are in the middle of constructing.
One of your challenges is how will you buy the new property and start on the construction if you do not have the funds from the sale of the old property yet? In these cases, most of our clients have the cash necessary to fund the purchase and construction up front, so this problem does not hold them up. The problem with cash buyers is not that they are unable to purchase the new property or do the construction, but wanting to get those items done within the 180 day time frame of a 1031 exchange. The reverse construction 1031 exchange is a great tool because in a reverse, the dates are "soft", meaning you can go past the 180 days if you need to in order to complete the exchange. You will lose the safe harbor, but in a reverse construction 1031 exchange that is quite normal due to the fact the IRS knows it takes well past 180 days to complete normal construction projects. In addition, there is nothing stopping you to go past the 180 days as long as you are working with a QI that holds onto to your new property for you during the entire reverse construction 1031 exchange period. In this manner, you can take your time to complete the exchange and not miss out on the advantages of doing a 1031 exchange. Call us and we will fill you in on the details.