Types of Exchanges

One of the Nation’s leading 1031 Qualified Intermediaries , 1031 AES provides expert Like Kind Exchange guidance for all for your transactional needs.

Delayed/Forward Exchanges

A delayed/forward exchange is the most common type of 1031 Exchange. In this scenario, the taxpayer sells an investment property (“Relinquished Property”), which, if structured properly in accordance with IRC Section 1031, is exchanged for another investment property or properties (“Replacement Property” or “ReplacementProperties”), and is sold and replaced on a tax deferred basis (up to 30-40% of the gain which would have otherwise been due and owing is saved).

The prerequisite IRC rules pertaining to the delayed/forward exchange are as follows:

Step 01.

The taxpayer must IDENTIFY a Replacement Property no later than 45 calendar days after the sale of the Relinquished Property. In order to properly identify and qualify as delayed/forward exchange, the taxpayer must adhere to either of the following IDENTIFICATION rules:

  • (i) 3 Property Rule – The Taxpayer may identify up to 3 Replacement Properties regardless of their fair market value. The identification documentation shall be sent to the Qualified Intermediary and signed by the Taxpayer and clearly describe the Replacement Property including the legal description or street address.
  • (ii) 200% Rule – The Taxpayer may identify more than 3 properties provided the aggregate fair market value (“FMV”) of all identified properties does not exceed 200% of the total FMV of all of the Relinquished Property.

In the event either of the above identification rules are not followed, the delayed/forward exchange will still qualify for tax deferral treatment if within 45 calendar days from the sale of the Relinquished Property, any Replacement Property is properly identified and received before 180 calendar days from the sale of the Relinquished Property has lapsed if the value is at least 95% of the aggregate FMV of all properly identified Replacement Properties.

Step 02.

The Taxpayer after complying with the foregoing IDENTIFICATION rules, must close title to the Replacement Property or Replacement Properties within 180 calendar days (including Saturdays, Sundays and Holidays) after the date of sale of the Relinquished Property or the date the Taxpayer’s tax return for the tax year in which the sale of the Relinquished Property occurred, whichever is earlier.

The foregoing rules can be found in IRC Section 1031(a)(3); Treasury Regulations Section 1.1031(k)-1(b)(e). The rules must be strictly adhered to unless extended by a federally declared disaster, including terrorist and military action.

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Reverse Exchanges

A reverse exchange (or “parking” of the Replacement Property”) occurs when the Taxpayer acquires the Replacement Property prior to the sale of the Relinquished Property.

In this scenario, the Replacement Property is purchased by an Exchange Accommodation Titleholder (“EAT”) pending the finalization of the exchange. The Taxpayer must complete the exchange within 180 days of the EAT acquiring title to the Replacement Property. The Taxpayer must identify which Relinquished Property or Relinquished Properties will be exchanged for the Replacement Property within 45 days of when the EAT acquired the Replacement Property.

Specifically, the EAT acquires the Replacement Property in a special purpose entity (a new single member LLC) to qualify for deferring the capital gains tax.

This type of exchange and an Improvement Exchange are more complex than the delayed/forward exchange outlined above and the Taxpayer is encouraged to speak with a member of 1031 AES’s legal team for further details.

Start a Reverse Exchange

Improvement/Construction Exchanges

An improvement exchange allows the Taxpayer to use proceeds from the sale of the Relinquished Property to make improvements to a Replacement Property.

In this scenario, the EAT is conveyed title to the Replacement Property while improvements are being conducted allowing the EAT to transfer the Replacement Property to the Taxpayer at a higher improved value.

Start a Improvement Exchange