1031 Exchange Types

1031 Exchange Types

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Forward 1031 Exchanges

Delayed 1031 Exchanges
Most 1031 exchange transactions are structured as a delayed exchanges, also known as a forward exchange. In a delayed exchange the exchanger sells the relinquished property first and subsequently acquires replacement property. The exchanger must identify the potential replacement property within 45 calendar days from closing on the relinquished property and close on identified properties no later than 180 days from closing of the relinquished property.

Simultaneous 1031 Exchanges
A simultaneous 1031 exchange takes place when one or more relinquished properties are exchanged simultaneously for one or more like-kind replacement properties. The relinquished property and the replacement property transactions all close on the same day in a simultaneous 1031 exchange.

Reverse 1031 Exchanges

A reverse exchange may be used when the Exchanger must purchase the replacement property prior to the sale of the relinquished property. The Exchanger may not own both properties at the same time so they are required to “park” title to either the replacement or relinquished property. In an parking  arrangement, an entity know as an Exchange Accommodation Titleholder (EAT) forms and owns a pass through entity, usually a limited liability company disregarded for federal income purposes, to take title to the “parked property”. A reverse exchange can be more complicated and costly, when compared to a forward exchange, but it an extremely useful tool for real estate investors to close on the replacement property quickly.

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Improvement 1031 Exchanges

In an improvement exchange, the exchange proceeds from the sale of the relinquished property may be used to acquire, and repair, construct or improve the replacement property.  The value of the property acquisition, plus the cost of the improvements, is used to calculate the tax deferred through the improvement 1031 exchange.  Similar to a reverse exchange structure, the Exchange Accommodation Titleholder (EAT) must hold title to the replacement property while the Exchanger improves the replacement property. In addition to identifying the replacement property, the specific improvements to be made must also be identified up to 45 days after closing. In addition, the improvements identified must be completed, and the exchanger must take title to the property, on or before the 180th day.

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