There are many different types of 1031 exchanges. Most commonly, Exchangors will sell their relinquished property first and replace with another like kind property second in a Delayed Exchange. Many other types of exchanges exist to fit the unique needs of an Exchangor. These exchange types range from simultaneous “swaps” of like kind property to improving land that is already owned by the Exchangor with exchange funds.
Forward / Delayed Exchange
A delayed 1031 exchange is when the old or relinquished property is sold and closed before the replacement or new property is purchased and closed. For example, a taxpayer enters into a contract or agreement to sell real property held for use in business or investment. The property closes, paying off associated debt, and the remaining net proceeds are wired to escrow under the taxpayer’s tax identification number. Once the replacement property is in contract for an equal or greater amount, a second closing is scheduled, net proceeds are wired and the delayed 1031 exchange is completed.
Simultaneous Exchange
Occasionally, the sale of the old property and the acquisition of the new property close in one extended closing. This is called a simultaneous 1031 exchange. Prior to the 1980s, all 1031 exchanges were simultaneous.
The majority of 1031 exchanges today are closings delayed by hours or a couple of days. This is fine because the purchase has up 180 calendar days to close. It is suggested that if the closings are with different title companies or attorneys and at least one day is allowed for the transfer of 1031 exchange funds. The wire transfer occurs typically within fifteen minutes of being initiated.
Reverse Exchange
A reverse 1031 exchange represents a tax deferment strategy when, for a variety of reasons, the replacement property must be purchased before the relinquished or old property is sold. It is more complex than a forward 1031 exchange and requires careful planning. These types of exchanges require the establishment of an Exchange Accommodator Titleholder (EAT) as the Exchangor cannot have possession of both properties at once. Apart from these few key differences, they follow the standard Delayed Exchange rules.
Build-to-Suit / Construction Exchange
A build to suit 1031 exchange, a type of a 1031 construction exchange, is used to make improvements to the replacement property. An example of a 1031 construction exchange is the sale of the commercial property that is then replaced with another improved commercial building. Proceeds from the sale of the old property go towards the build out.
A construction or a build to suit exchange implies that the replacement property is acquired prior to or after the old property is closed. Improvements to the new property are made with title conveyed to the taxpayer either on or before the 180th calendar day post initial closing. As long as the value of the improvements plus the cost of the replacement property is equal to or greater than the old property, the construction exchange allows taxpayers to defer the capital gains tax and recaptured depreciation triggered when the old or relinquished property was closed.
Leasehold Improvement Exchange
Leasehold improvement exchanges allow an Exchangor to improve property already owned. A thirty-year lease or more is considered real property eligible as a 1031 replacement property. The lease and improvements made by a third party can be conveyed to the Exchangor given the lease is maintained for at least two years and the related party collects fair market ground rent from the Exchangor.
The Internal Revenue Service (IRS) does not view improvements to land owned by the Exchangor as like-kind property for two reasons. First, improvements consist of materials and labor which are not real property until affixed to the real property. Second, an Exchangor cannot purchase property from oneself but rather receive like-kind property from another party. The 1031 exchange rules must also be followed.
International Exchange
Internal Revenue Code (IRC) Section 1031 applies to all citizens or residents of the United States (US) or non-resident aliens subject to US federal income taxes. Many Exchangors are not aware that international property is eligible for 1031 exchange tax treatment. Though it can be complex, it is possible to execute an international property exchange. When selling real property held for productive use in a trade, business or for investment, a 1031 exchange allows individuals, partnerships, corporations, limited liability companies and trusts to defer the federal capital gain and recaptured depreciation taxes when selling property held for the proper intent, regardless of where the property is located. Property used predominantly in the US is eligible as replacement property held in the US, while property located outside the US is eligible for 1031 consideration with property held internationally.
Contact Us
Atlas 1031 has been accommodating all types of exchanges for over 16 years. Should you have any questions regarding any of these exchange types, or the fees associated with our services, please contact us through the consultation form below or call our office at 800-227-1031. We look forward to hearing from you.
