Which of the Four Types of 1031 Exchanges Will You Do?
September 26, 2016
While 1031 Exchanges are an excellent tool for real estate investors, there are many IRS rules to navigate. It is wise to understand the complex nature of 1031 Exchanges.
When executing a 1031 exchange there are four types to choose from. The first and original exchange type from 1921 is the Simultaneous Exchange. This exchange occurs when the real estate owner sells one property and acquires the replacement property at the same time. When 1031 exchanges first began, this was the simple act of farmers trading parcels of land. No longer widely used, the Simultaneous Exchange is still an available option. This type of exchange does not require the use of a Qualified Intermediary, but it is highly recommended.
The second exchange type to consider, and probably the most widely used exchange type, is the Delayed or Deferred Exchange. This exchange type requires the use of a QI. The QI and the exchanger work together to identify the possible replacement property or properties using one of the Identification Rules laid out by the IRS. The exchanger has 45-days to identify and 180-days total to close on the replacement property.
The third exchange type is the Construction or Build-to-Suit Exchange. This exchange gives the exchanger more flexibility to not only use their exchange proceeds to acquire property but also to either develop new property or improve another property. Typically, the exchanger will enter into a Delayed Exchange and acquire the improved or developed property as a replacement. For this exchange to be compliant, the exchanger must expend all proceeds from the relinquished property on the new property’s improvement or construction by the end of the 180-day time period. Any unused proceeds will be taxed as boot.
The fourth exchange type is a Reverse Exchange. This exchange is when the exchanger finds the property in which he or she wants to own prior to selling their relinquished property. If the exchanger acquires the replacement property first, he or she has 45-days to identify the property to be sold and a total of 180-days to close the relinquished property. In this exchange type, the QI actually will acquire the replacement property for the exchanger and hold title. The QI will then transfer title to the exchanger upon liquidation of the relinquished properly.
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Please note: 1031RPS.com and its associated personnel are not tax professionals, and they recommend investors consult with their tax advisor to ensure their 1031 Exchange is within the IRS guidelines established.