1031 Exchange Properties

The 1031 property exchange is also known as the tax-deferred exchange.  This provision in the tax laws is probably the most useful tax deferral strategy for any real estate investor.  Everyone in the real estate business knows of this provision so if you are consulting with an expert about the best way to lower the taxes you have to pay when you want to exchange your real estate property with another like-kind property, the 1031 exchange provision in the tax is bound to come up in your discussions.

But there are different kinds of exchanges that may occur in the 1031 exchange property provisions.  These different exchanges include the simultaneous exchange, the delayed exchange, and the reverse exchange.  It is important to look deeper into each of these exchanges so you will be able to choose the kind that is most suitable for you:

The simultaneous exchange

In this deal, the exchange between the two properties, namely the relinquished and the replacement properties will have to be finished in the same day.  There is no time interval when closing this deal so you can expect back-to-back closings for the two properties.  You should note that the simultaneous exchange is governed by safe harbor rules.

The delayed exchange

Unlike the simultaneous exchange, you can expect to have time intervals in the delayed exchange between closing the deal of the relinquished property before acquiring the replacement property.  The delayed exchange is also sometimes known as the “Starker exchange” in reference to a previous case in the Supreme Court which ruled in favor of the investor against the Internal Revenue Service.
 
The reverse exchange

Then there is the reverse exchange.  The reverse exchange is where the replacement property is acquired even before the relinquished property can be sold.  Usually, you would need an intermediary in the reverse exchange.  This is because the intermediary will be the one who will hold the title to the replacement property until the investor can find a buyer for the relinquished property and close this sale.  There must be an exchange agreement between the investor and the intermediary because the intermediary will be the one to convey the replacement property title to the investor once all the transactions have been completed.

The improvement exchange

The last kind of 1031 exchange property is the improvement exchange.  Here, the investor may acquire a property through an intermediary and then improve on its structure before it will be acquired as a replacement property.  An investor needs to do this in some cases because the 1031 does not allow improvements to occur after he or she has already acquired the replacement property in his or her name, so it is important for improvements to be completed before the investor acquires the property.

As you can see, the 1031 exchange property provisions can sometimes be complicated but there are always ways to get around these provisions.  The inconveniences you might experience on your property exchange endeavor will be worth it in the long run because of the tax benefits you receive when you use the 1031 exchange provision.  

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