Types of 1031 Exchanges
Four types of 1031 Exchanges accommodate most investment scenarios.
A Simultaneous Exchange occurs when two properties are exchanged simultaneously. This can happen when two properties are swapped, property for property, which is called a two-party exchange. This can also happen when a property is sold and the replacement property is purchased simultaneously. To ensure safe harbor protection, a Qualified Intermediary should facilitate the exchange.
Forward Delayed Exchange
The most common type of exchange, the Forward Delayed Exchange, happens when a property is sold (Relinquished Property) and another property is purchased (Replacement Property) within 180 days following the sale of the Relinquished Property. For a safe harbor Forward Delayed Exchange, the sale proceeds must be held by a Qualified Intermediary between the sale of the Relinquished Property and the subsequent purchase of the Replacement Property.
Construction Exchanges, or Build-to-Suit Exchanges, occur when the taxpayer uses the funds from the sale of the Relinquished Property to construct improvements on the Replacement Property. The property on which the improvements are constructed cannot be held by the taxpayer but must be held by a third party called an Exchange Accommodation Title Holder until either the improvements are complete or until the end of the 180 Exchange Period, after which the title holder is deeded the Replacement Property with the improvements. Due to its complexity, a Construction Exchange incurs higher fees.
In a Reverse Exchange, the Replacement Property is purchased before the sale of the Relinquished Property. The Replacement Property must be held by an Exchange Accommodation Title Holder until the sale of the Relinquished Property, which must take place within 180 days following the purchase of the Replacement Property. Due to its complexity, a Reverse Exchange incurs higher fees.
Explore These Additional 1031 Exchange Topics
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