Five Ways To Complete A 1031 Exchange

When it comes to deferring capital gains taxes on the sale of investment or business property, nothing beats the power of a well-structured 1031 exchange. But not all exchanges are created equal. In fact, there are many different ways you can take advantage of the tax savings.

Simultaneous Exchange

As the name implies, a Simultaneous Exchange is an exchange where the closing of both the Relinquished Property and the Replacement Property occur on the same day. With this exchange type, the two closings usually occur back-to-back. IRS safe harbor regulations impact this type of exchange.

Delayed Exchange

When the Replacement Property is acquired sometime after the Relinquished Property is sold, it is considered a Delayed Exchange. In this scenario, the exchanges are not simultaneous and do not occur on the same day. These type of exchanges are commonly known as a “Starker Exchange” after the landmark Supreme Court case allowing this sort of exchange to qualify under IRS code. However, there are strict timeframes and restrictions to ensure the validity of these exchanges.

Reverse Exchange

In some cases, an investor identifies and purchases a replacement property before selling the relinquished property. These type of exchanges are known as a Reverse Exchange, and are subject to IRS safe harbor guidance. In this exchange, an intermediary will hold the title of the replacement property until the sale of the relinquished property is completed.

Improvement Exchange

In some cases, an investor will find a replacement property but want to make improvements on it (e.g. build on an unimproved lot, upgrade an existing property) before actually taking the property as replacement property for the exchange. They want to delay ownership because the IRS does not recognize improvements made after closing for purposes of 1031 valuation. In these cases, an intermediary holds the title for the replacement property until the improvements are completed. Only then is the title transferred to the investor. This type of transaction is considered an Improvement Exchange.

As you can see, the different types of 1031 exchanges range from quite straightforward to increasingly complex. For novice and seasoned investors alike, there are many hidden pitfalls along the way that can trap the unwary. Don’t jeopardize the tax savings by making an unintended mistake. Working with an experienced qualified intermediary can help you avoid the most common errors facing investors completing these exchanges.

To learn more about 1031 exchanges or our qualified intermediary and replacement property locator services, please visit our website.