Four Most Common Types Of 1031 Exchanges

As an investor, you have likely considered a 1031 exchange in order to defer capital gains tax. But did you know that there are actually a number of different ways that an exchange can be completed?

Simultaneous Exchange

This type of exchange occurs 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. Although these type of exchanges are possible, logistics often prove difficult. It is far more common to pursue the next 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. 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

Occasionally, 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.

To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.