A Delayed Exchange - the type of 1031 utilized most often and to which the majority of this guide is devoted, is an exchange where the Replacement Property is closed on at a later date than the closing of the Exchange Property. The exchange does not have to be simultaneous or on the same day. This type of exchange is sometimes referred to as a "Starker Exchange" after the well known Supreme Court case in which ruled in the taxpayer's favor for a delayed exchange before the Internal Revenue Code provided for such exchanges. There are strict time frames established by the Code and Regulations for completion of a delayed exchange, namely the 45-Day Clock and the 180-Day Clock.
A Reverse Exchange (Title-Holding Exchange) - an exchange in which the Replacement Property is purchased and closed on before the Exchange Property is sold. Usually the Qualified Intermediary creates a single purpose LLC, or limited liability company, for the purpose of acquiring the Replacement Property and holding title to it until the taxpayer can find a buyer for his Exchange Property and close on the sale under an Exchange Agreement with the Qualified Intermediary. The replacement property will be available for use by the taxpayer during the exchange. Subsequent to the closing of the Exchange Property (or simultaneous with this closing), the Qualified Intermediary conveys title to the Replacement Property to the taxpayer.
An Improvement Exchange (Title-Holding Exchange) - also called a “Build to Suit Exchange” is an exchange in which a taxpayer desires to acquire a property and arrange for construction of improvements on the property before it is received as replacement property. The improvements are usually a building on an unimproved lot, but also include enhancements made to an already improved property in order to create adequate value to close on the Exchange with no boot occurring. The Code and Regulations do not permit a taxpayer to construct improvements on a property as part of a 1031 Exchange after he has taken title to that property. Therefore, it is necessary for the Qualified Intermediary to create a single purpose LLC, or limited liability Company, for the exchange. The LLC will, on behalf of the taxpayer, purchase, take title to and hold title to the property until the improvements are constructed and then convey title to the improved property to the taxpayer as replacement property. Following the completion of the exchange the LLC will be dissolved and its tax return will be filed by the Qualified Intermediary.
A Simultaneous Exchange - is an exchange in which the closing of the relinquished property and the replacement property occur on the same day, usually simultaneously. There is no interval of time between the two closings. This type of exchange is covered by the “safe harbor” Regulations and is the only exception to the IRS’ requirement that a Qualified Intermediary be used to facilitate each exchange. However the exchange must be truly simultaneous. Even the delay caused by wiring to an escrow company in another county will ruin a simultaneous exchange. There is a risk that a short delay in closing can result in full taxes being due. Alternately, since the guidelines for delayed exchange allow for much more time between closings, many people choose to set up a delayed exchange instead of a simultaneous exchange.
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