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Sometimes it's obvious which type of 1031 exchange to use. More often, property transactions are complex and it's not immediately obvious how or even if a transaction can qualify for a 1031 exchange. Use the information here as a guideline. Talk with an Xchange Solutions facilitator about the best way to structure your transaction to meet your needs.
SIMULTANEOUS EXCHANGE - Initial property is sold and replacement property is purchased at the exact same time and at the same escrow office. This is the original type of 1031 exchange. The simultaneous exchange can be logistically difficult to accomplish, especially with a complex transaction involving properties in different cities or states. Due to the nature of the transaction only one party in the transaction can do a 1031 exchange.
DELAYED EXCHANGE - Property is sold and replacement property is purchased within 180 days. Replacement property must be identified within 45 days. Because of the 180 day window this is the most popular type of 1031 exchange. Click to see an outline of the steps in a typical 1031 exchange.
IMPROVEMENT EXCHANGE - Also known as a "construction" or "build-to-suit" exchange. In order to have a completely tax deferred transaction, the exchanger must trade "across" or "up" in equity and debt. If the exchanger goes down in value when acquiring the replacement property he/she will have a tax liability on the cash or mortgage boot.
By making improvements to the property the exchanger can defer the tax liability. Note these important requirements.
PERSONAL PROPERTY 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.
REVERSE EXCHANGE - The replacement property is purchased before the initial property is sold. This is an option when the exchanger must close on the replacement property before a buyer has been found for the relinquished property.
Special care must be taken with reverse exchanges.
Xchange Solutions is the only facilitation company to specialize in reverse exchanges.
Though improvement and reverse exchanges are more involved and complicated than other types of exchanges, sometimes they are the only solution to an otherwise impossible exchange transaction. These greatly expand the ability of the investor to maximize his/her investment position. Xchange Solutions is the only intermediary to specialize in reverse and improvement exchanges.
A few situations do not qualify for a 1031 exchange, such as: