It’s Important for Investors to Understand the Types of Exchanges Available…
Exchanging can range anywhere from a simultaneous exchange of two properties to a complex, multi-leg, multi-party transaction involving construction and/or reverse exchanges. It’s important for investors to understand the different types so they know what is best for you. Note, the vast majority of exchanges performed are delayed exchanges.
The Simultaneous Exchange
In this transaction, the closing of the Relinquished Property and the Replacement Property take place on the same day - there is no interval of time between closings. Prior to the 1979 Starker decision, most exchanges were limited to the simultaneous format. Since 1991, the only “safe harbor” for a simultaneous exchange is with the use of a Qualified Intermediary.
The Delayed Exchange
In this type of exchange, the Replacement Property is closed on a date later than the closing of the Relinquished Property. Sometimes, this kind of transaction is called a “Starker Exchange,” after the well-known 9th District Court case in which the court ruled in the taxpayer’s favor for a delayed exchange prior to current IRS rules and regulations. The current IRS code dictates strict time frames for completion of a delayed exchange which are the 45 days to identify and 180 days to complete the entire exchange.
The Improvement or Construction Exchange (Title-Holding Exchange)
This exchange takes place when an Investor wants to acquire a property and arrange for construction of improvements on the land before it is received as Replacement Property. Typically, improvements are a building on an unimproved lot, but may include enhancements made to an already-improved property to create adequate value to balance the Exchange.
Note: Federal law does not permit a taxpayer to construct improvements on a property as part of a §1031 Exchange after the buyer has taken title to the property as Replacement Property in an exchange. In other words, it becomes necessary for the Intermediary to close on, take title, and hold title to the property until the improvements are constructed, and then convey title to the Improved Property to the taxpayer as Replacement Property.
Improvement Exchanges are also done in the context of both Delayed Exchanges and Reverse Exchanges, depending on the circumstances.
The Reverse Exchange (Title-Holding Exchange)
Revenue Procedure 2000-37 published by the Internal Revenue Service September 15, 2000, provided the first safe harbor for taxpayers wishing to utilize the reverse exchange format.
A Reverse Exchange is needed when the Replacement Property must close before the client’s Relinquished Property closes. The Exchange Accommodation Title holder can take title to the Replacement Property or the Relinquished Property normally based upon what the replacement property lender will allow.
Why would you use this type of exchange
Structuring the Reverse Type ‘A’ exchange – (Exchange Last)
Structuring the Reverse Type B Exchange - (Exchange First)
Multi-Property and Multi-Party Exchanges
You, investor, can trade out of one property into several or consolidate from smaller properties into one larger property. Also, two or more investors owning a property together can trade into separate properties.
Personal Property Exchanges
Investment personal property is exchangeable for similar-use personal property. The government has 13 general asset classes. Property belonging in one general asset class can be exchanged for another in the same general asst class (i.e. an aircraft can be exchanged for an aircraft or cows for other cows).
Additionally, the government has assigned North American Industry Classification System (NAICS) codes for property. Property in the same NAICS code can be exchanged for property in the same NAICS code.