Types of Exchanges

Delayed Exchange

The delayed exchange is the most common type of 1031 tax deferred exchange. The delayed exchange refers to the time delay between the sale of the relinquished property and the purchase of the replacement property. The sale of the replacement property occurs first in time. The 45 day identification period and the 180 day closing deadline play their part in this type of exchange. The qualified intermediary is required to hold the exchange funds during this period to avoid receipt by the taxpayer. The taxpayer must identify in writing to the intermediary the replacement property it wishes to purchase and must close on that property within the required time periods.


Simultaneous Exchange
The simultaneous exchange occurs when there is no delay between the sale of the relinquished and replacement property. The sale and the purchase occur at the same time. Although technically a qualified intermediary is not required in a simultaneous 1031 tax-deferred exchange, it is recommended that one be used. This is to avoid any question of receipt of funds by the taxpayer. In a simultaneous exchange, the intermediary instruction the closing entities as to the manner in which funds are disbursed so the taxpayer is never in danger of receipt of those funds. Receipt of funds disqualifies the exchange such that the capital gains tax is imposed on the proceeds of the sale.


Reverse Exchange
A reverse exchange occurs when the purchase of the replacement property occurs before the sale of the relinquished property. In a reverse exchange, there is a separate entity, the Exchange Accommodation Titleholder (EAT) created to hold the subject property during the exchange period. This entity either purchases the replacement property on behalf of the exchangor until the relinquished property is sold or it takes title to the relinquished property until a third party buyer is found and at that time, the property is transferred to this third party. If financing is involved, the EAT typically acts as the borrower in the transaction. The financing is then assumed by the taxpayer when it takes title to the property at the end of the exchange period. The same deadlines apply to a reverse exchange that apply in a delayed exchange. The taxpayer has 45 days to identify a relinquished property and 180 days to close on one or more of those identified properties. The same rules of identification apply to reverse exchanges, the taxpayer can utilize either the three property rule, the two hundred percent rule or the ninety-five percent rule to identify relinquished properties.


Improvement Exchange
An improvement exchange occurs when the taxpayer chooses to use exchange funds to improve the exchange property purchased. The taxpayer can either construct an entirely new property on raw land or rehab an existing property. When engaging in an improvement exchange, it is important that the taxpayer not only identify the property that it is purchasing, but it also must specifically identify the improvements made to that property. Typically, in an improvement exchange, an EAT is formed to take title to the replacement property during the remainder of the exchange period, until improvements are completed. If financing is involved in the improvement exchange, this entity will act as the borrower with the taxpayer assuming any financing at the end of the exchange period. The taxpayer must complete all improvements and transfer the property from the EAT within the 180 day time period.