What you should know about 1031 Exchange



1. Simultaneous Exchange

Takes place when the property that you’re selling and the property that you’re acquiring close the same day as one another. If the closing of either property is delayed for a short period of time, the exchange could be disqualified, which means that you would need to pay full capital gains taxes. There are two types

a) You swap deeds with the owner of the other investment property.

b A three-party exchange where the transaction between you and the owner of the other investment property is facilitated by a third party called a Qualified Intermediary.


2. Delayed Exchange

The most common 1031 exchange that you can make. You will be able to relinquish or sell your investment property before you purchase another investment property. Allowing to use the funds from the sale of your property to buy the new property. You will have 45 days to identify a new property and 180 days to close.


3. Reverse Exchange

By purchasing a new property beforehand, you can wait to sell your current property until the market value of the property increases. This type of exchange must be 100 percent cash. Majority of banks don’t provide reverse exchange loans. In addition, you will have 45 days to determine which one of your current investment properties are going to be relinquished. You will then have another 135 days to complete the sale.


4. Construction or Improvement Exchange

A construction or improvement exchange is a type of exchange that allows you to make improvements to the property before the actual exchange takes place. The property will be placed with a qualified intermediary for 180 days, during which you can use the exchange equity to make the necessary improvements. First, all exchange equity will need to be spent as a down payment or by making improvements to the property within 180 days. The taxpayer will need to receive the same property that was identified on the 45th day, which means that it can’t change significantly. Once the property is given back to the taxpayer, it will need to be at an equal or greater value. These improvements need to be made within 180 days.