When it comes to 1031 Exchanges, it is sometimes obvious which type is suitable for your situation. Other times, it can be confusing as to how – or even if – a property transaction can qualify as an exchange. A qualified intermediary with experience in all varieties of 1031 Exchanges can help you understand how best to structure your transaction to meet your specific objectives.
The five types of 1031 Exchanges, include:
The original type of exchange, a simultaneous exchange is exactly what the name implies. Original property is sold and replacement property purchased at the same time and in the same escrow office. While it sounds convenient, the logistics can sometimes prove difficult, particularly when the properties are in different cities or states or the transaction is especially complex.
The most common type of exchange, the delayed exchange allows the seller to acquire replacement property within 180 days of the sale of the original property. However, the replacement property must be identified within 45 days, and deadlines are strictly enforced.
Personal Property Exchange
This type of exchange allows the sale of one asset and replacement with the same type of asset within 180 days. For this type of exchange to be valid, the asset must be of the same type. The most common way to determine asset type is to use the Standard Industrial Classification (SIC) codes, which assigns all business assets to specific groups. The replacement asset does not have to be identical, only of the same type.
This type of exchange allows the replacement property to be built-to-suit, improved or modified to the buyer’s specifications. It is also referred to as a Construction Exchange. So as to benefit from complete tax deferral, the seller’s equity and debt in the replacement property must be equal to or more than the equity and debt in the original property. If the value decreases, tax liabilities can be deferred through improvements to the property.
In some circumstances, an investor wishing to complete a 1031 Exchange must close on the replacement property before the sale of the original property is complete. In these circumstances, a valid exchange can still be accomplished; however, a number of specific regulations govern these transactions.