Types of 1031 Exchanges

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Forward Exchange

The most common type of exchange, the “Forward” or “Standard” delayed exchange, happens when a property is sold (the Relinquished Property) and another property is purchased (the Replacement Property) within the 180 days following the sale of the Relinquished Property. For a “forward” delayed exchange under the safe harbor rules, the sale proceeds must be held by a Qualified Intermediary between the sale of the relinquished property and the subsequent purchase of the replacement property.

Simultaneous Exchange

A Simultaneous Exchange occurs when the relinquished and replacement property escrows are closed at the same time. This can happen when two properties are swapped, property for property between the same two individuals or entities, or it can also happen when the relinquished property is sold and the replacement property is purchased both on the same day. Because timing is critical and things can go wrong with escrow or title, a Qualified Intermediary may be necessary to facilitate the exchange, as this gives the investor the protection of the 1031 safe harbor rules under a forward exchange.

Reverse Exchange

In a Reverse Exchange, the replacement property is purchased before the sale of the relinquished property. The replacement property must be held by an Exchange Accommodation Titleholder (EAT) until the sale of the relinquished property, which must take place within the 180 days following the purchase of the replacement property. The relinquished property is also transferred to the EAT, and the EAT then deeds the relinquished property to the Buyer. At the conclusion of the reverse exchange, title to the replacement property is transferred from the EAT to the exchangor. Due to its complexity and inherent risks, a reverse exchange generally incurs much higher fees, but may be more convenient for the taxpayer with regard to locating a replacement property.

Build-to-Suit or Improvement Exchange

Build-to-Suit or Improvement/Construction Exchanges occur when the taxpayer uses the funds from the sale of the relinquished property to construct improvements on the replacement property. The property on which the improvements are constructed cannot be held by the taxpayer but must be held by a third party, the Exchange Accommodation Titleholder (EAT), until either the improvements are complete or until the end of the 180 day exchange period, after which the replacement property, with the improvements, is deeded to the taxpayer. As with the reverse exchange, due to its complexity and inherent risks, this type of exchange generally incurs higher fees, but may be more convenient for the taxpayer if the taxpayer has a clear vision and knows what is and is not possible to achieve during the 180 day time frame.

Personal Property Exchanges

When exchanging personal property, the definition of “like-kind” is much more restrictive. Personal property is considered like-kind only if it appears in the same General Asset Class or Product Class. For example, while you can exchange a rental house for a shopping center, you can’t exchange a cow for a bull or a car for a truck. Definitions of what is considered real property and personal property can vary from state to state and, similar to real property, personal property used predominantly within the United States and personal property used predominantly outside the United States are not like-kind. It is essential to consult with a tax advisor when structuring personal property exchanges because one transaction may have multiple exchanges, involving tax deferral on both the personal and real property.