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1031 Exchange Types
Simultaneous Exchange
A simultanous exchange is when an initial property is sold and a replacement property is purchased at the same escrow office at the same time. This type of 1031 exchange has historical longevity and was the most common and involve only a single party. Because of the logistical difficulties involved in having an escrow office with suitable properties for sale and purchase at the same time, a simultaneous exchange can be difficult especially when a transaction involves properties in different metro areas or states.
Reverse Exchange
A reverse exchange means a replacement property is purchased before the sale of an initial property. This type of exchange suits situations where an exchanger is at advantage when a he or she must close on the replacement property and can still sell an initial property within the exchange timeline. Special important rules apply to reverse exchanges that should be discussed with your qualified intermediary.
Delayed Exchange
A delayed exchange is when a property is sold and a replacement property is purchased within a 180-day time frame. Careful attention to time lines and deadlines is critical to the success of these exchanges and to avoid major pitfalls. Replacement properties must be identified within 45 days. Because these transactions are structured within a tight time window, they are very popular.
Construction, Improvement or Build-to-Suit Exchange
In order to comply with 1031 exchange tax rules, the exchanger must trade up in both equity and debt. If the property value involved in the purchase is lower than the value of those sold, then the exchanger will have a tax liability on the cash or mortgage boot. There is a method however for also reducing or eliminating this tax liability by making improvements to the property. These property improvements need not be completed within the 180 day exchange period, however the value of any portion of the improvements not completed within the time frame will not qualify as replacement property. Details and advice for extending the exchange period and/or including a greater percentage of planned or actual improvements should be discussed in detail with your qualified intermediary.
Personal Property Like-Kind Exchange
The sale of one asset and acquisition of the same type of asset within 180 days. The key word is type of asset. One method of determining the type of asset is using the SIC (Standard Industrial Classification) codes. The "types" become anything in that same group. All personal property used in business fits into a depreciation classification. Raspberry bushes are the same type as blueberry bushes. A commercial aircraft is like-kind to another commercial aircraft.
Improvement and reverse exchanges tend to require greater time investment and are inherently more complex than other types of exchanges, however these types also increase the investor's ability to maximize certain investment positions that mayu be very advantageous.
