Part 4- 1031 Exchanges
A Standard or Delayed 1031 Exchange is where you sell a property, identify another property you like and close on the purchase of that property on a later date.
A Simultaneous 1031 Exchange is when you sell one property and acquire another at the exact same time. This is most commonly used when two investment property owners want to swap properties and both want to utilize a 1031 exchange. A “swap” or “trade” can eliminate the need for a Qualified Intermediary (“QI”). These owners can swap deeds or a third party facilitator can schedule and oversee a simultaneous exchange.
There are some disadvantages of simultaneous exchanges. Possibly the most difficult is finding someone with a property you want that is willing to swap for your property on the same timeframe. Also, equity and debt must also match on both properties in order to avoid one part recognizing some “boot”. The 1991 Treasury Regulations state that the only safe harbor for a 1031 exchange is using the services of a QI, therefore exchangers may not be saving the cost of QI services in a simultaneous exchange after all.
A Reverse 1031 Exchange is used when you identify the property you want to exchange for prior to selling your own property. This is typically utilized when you have a huge gain and you just have to have a particular property. The taxpayer must purchase the property with the QI on title. The timeline works in the exact opposite manner as in a Standard or Delayed 1031 Exchange. The exchanger will have an exact 45 calendar days from the purchase of the new property to identify which property you want to sell and as many as 180 calendar days from the purchase of the new property to close on the sale of your original property completing the exchange.
An Improvement 1031 Exchange allows the investor to constrict the “perfect” replacement property in order to acquire exactly what is desired. This can be as simple as completing repairs or upgrades to existing structures or building new construction from the ground up. Improvement exchanges typically occur when an investor sells their property and finds a replacement property that is of lesser value. For Improvement Exchanges the QI takes ownership of the new property and disburses funds for improvements as needed. Once the new property reaches the sold value of the old property the title transfers. Disadvantages of Improvement Exchanges include: more costly QI fees, and a tight timeline - all improvements must be completed in a 180 calendar day timeline with no IRS extensions or forgiveness for work not completed by the deadline.
This is Part 4 of a 5 part series addressing 1031 exchanges. Please visit my other blogs for more information on 1031 Exchanges:
Part 1 - What is a 1031 Exchange?
Part 2 - 1031 Exchange Process
Part 3 - 1031 Exchange Rules
Part 5 - Advantages of 1031 Exchanges
If you are considering selling an investment property I highly recommend you speak to your financial advisor about the possible benefits a 1031 exchange could have for you. It’s also important to note that I am a real estate agent and not an accountant, a QI, or an attorney. Please seek legal and financial advice from those who are qualified.
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