Types Of 1031 Exchanges
Simultaneous Exchange:
A Simultaneous 1031 Exchange occurs when the
initial property is sold and a new property is purchased. Often this type of exchange is logistically
difficult to accomplish. It is essential that both transactions meet their benchmark deadlines or the 1031 exchange
will fail. It is important to be sure you have a Qualified Intermediary to help guide you through the transaction
and meet crucial deadlines. Additionally, if the properties are in different cities or states the transaction is
further complicated.
Delayed Exchange:
This type of 1031 Exchange allows for more flexibility when it comes to timing the transaction, so it is the most
popular choice for investors. A Delayed 1031 Exchange allows the initial property to be sold before the replacement
property is purchased. This type of exchange is commonly referred to as a "Starker Exchange". It is important to
note ,however, that there are time restrictions and important deadlines involved in this exchange. The replacement
property must be identified within 45 days following the closing of the initial property and the closing of the
replacement property must be within 180 days after the closing of the initial property. In order for a Delayed Exchange
to be successfully completed, there must be a Qualified Intermediary. The Qualified Intermediary acquires the relinquished
property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the
replacement property to the taxpayer. The Internal Revenue Code prohibits accountants, attorneys, and realtors who have
worked for the taxpayer during the prior two years to act as their Qualified Intermediary.
Important Rule:
In order to qualify for the deferred tax exchange there are two critical points that must be observed:
First, the entire cash or monetary proceeds from the original sale must be reinvested in acquiring the replacement
property. Any cash proceeds retained from the sale are taxable.
Second, the replacement property must be subject to equal or greater debt than the initial property sold or the buyer
will be forced to pay tax on the amount of reduction.
Reverse Exchange:
In a Reverse Exchange exchange the replacement property is purchased before the relinquished property is sold. This is
generally accomplished by the Qualified Intermediary acquiring title to the replacement property and holding it until
the taxpayer finds a buyer for the relinquished property. Before or simultaneous to the closing of the initial property,
the Qualified Intermediary conveys title of the replacement property to the taxpayer.
This is a complex that should be approached with caution. The investor must take into consideration
various 1031 regulations. Most importantly, 1031 regulations do not allow the investor to own the initial property and
the replacement property at the same time. The IRS has issued new safe harbor guidance rules on Reverse Exchanges that
should be discussed with your tax advisor.
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American Real Estate Exchange Services does not provide tax or legal advice, nor can we
make any representations or warranties regarding the tax consequences of your exchange
transaction. You should consult your tax and/or legal advisors before undertaking a 1031
exchange.
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