1031 Exchange Types

Types of Exchanges

A 1031 exchange involves selling one investment property and purchasing another 'like-kind' property to defer capital gains tax. Investors have four main types of 1031 exchanges to choose from:

  • Reverse Exchange: Involves purchasing the replacement property before selling the relinquished one, with a 180-day deadline applying to the sale of the relinquished property.
  • Standard Delayed Exchange: The sale of a relinquished property is followed by the purchase of a replacement property within 180 days. This is the most common and straightforward exchange type.
  • Simultaneous Exchange: The sale of the relinquished property and the purchase of the replacement property occur on the same day.
  • Improvement Exchange: Uses the proceeds from the sale of the relinquished property to buy and improve the replacement property, with all improvements needing to be completed within 180 days from the sale.

All of these exchange types allow you to acquire a new investment property and defer capital gains tax.

Reverse 1031 Exchange

When performing standard 1031 exchange transactions, the investment property sells first. After this sale, the seller buys a new piece of real estate. A reverse 1031 exchange allows you to buy the new property before selling the existing one.

IRS Revenue Procedure 2000-37 sanctions the reverse exchange “safe harbor” rule. This procedure provides a parking arrangement for investments. If a seller cannot sell the existing property within the standard 1031 exchange time frame, in that case, an Exchange Accommodation Titleholder (EAT) can hold title on the desired property until the first property sells. The seller is then able to take possession of the new investment parcel from the EAT.

Reverse Exchange Rules
  • Reverse exchanges have a 180-day deadline. The 180-day countdown starts on the date the EAT buys the replacement property for the taxpayer/seller.
  • Within 45 days after the purchase of a parked property, the taxpayer must formally identify the relinquished property(s).
  • The EAT and the taxpayer must complete a Qualified Exchange Accommodation Agreement.
When is a Reverse Exchange Useful?
  • The owner of the investment property finds the ideal replacement property before finding a buyer for the exchange property.
  • The real estate investor needs to buy prime real estate as it enters the market.
  • Real estate sellers wish to avoid identifying replacement property in the 45 days required by a 1031 exchanges
Forward Reverse Exchange

Financing involved? Often, a taxpayer considering a reverse exchange will not have the cash to fund purchasing the new replacement property and needs financing for the purchase. Depending on the lender’s financing structure restrictions, it may not be possible to park the replacement property in the name of the Exchange Accommodator Titleholder (EAT). The taxpayer may be able to structure a "Forward" or "Relinquished Reverse Exchange." Here, the taxpayer parks the relinquished property with the EAT rather than the replacement property in the EAT. Using this approach, the taxpayer transfers their interest in the relinquished property. Doing this allows them to buy the replacement property in their name. Certain restrictions apply for completing this type of exchange. 

Forward Reverse Exchange Rules
  • In a forward reverse exchange, the EAT takes title to (or parks) the relinquished property. Doing this allows the taxpayer to directly acquire the replacement property. Exercise caution before deeding the property to the EAT if there is a loan on the relinquished property. This may not be an option if there is a loan on the relinquished property.
  • Forward reverse exchanges have a 180-day deadline. The 180-day countdown starts when the EAT takes title to the relinquished property.
  • Within 45 days after taking title of the parked property, the taxpayer must formally identify the replacement property to be acquired.
  • The EAT and the taxpayer must complete a Qualified Exchange Accommodation Agreement.
When is a Forward Reverse Exchange Useful?
  • The lender on the replacement property will not allow the taxpayer to finance/take the title in the EAT's name.
  • The owner of the investment property listed for sale finds the ideal replacement property before finding a buyer for the exchange property.
  • The real estate investor needs to buy prime real estate as it enters the market.
  • Real estate sellers wish to avoid identifying replacement property in the 45 days required by a 1031 exchange.

Learn more about reverse 1031 exchanges in our on-demand webinar

SCHEDULE A MEETING WITH A QUALIFIED INTERMEDIARY

To learn more about 1031 reverse exchanges, schedule a meeting with a 1031 exchange specialist or call 239-333-1031.

Standard Delayed 1031 Exchange

Standard "delayed" 1031 exchanges involve the sale of a relinquished investment property and the purchase of a replacement investment property. A delayed exchange occurs when the replacement property closes within 180 days from the sale of the relinquished property. This is the most straightforward and common type of 1031 Exchange.

Simultaneous 1031 Exchange

In a simultaneous 1031 exchange, the sale of the relinquished property and the purchase of the replacement property occur on the same day. They can happen in two ways.

1. Two parties “swap” properties with each other.

2. The exchanger closes on the sale of the relinquished property and buys the replacement property on the same day.

FREQUENTLY ASKED QUESTION
CAN A 1031 EXCHANGE BE USED FOR INTERNATIONAL PROPERTIES?

Yes, you can use a 1031 exchange for international properties, provided that both the relinquished and replacement properties are situated outside the United States. The same 1031 exchange rules apply.


1031 Improvement Exchange

A 1031 improvement/construction exchange may be useful when the taxpayer is in the 45-day identification period and finds a replacement property that is significantly lower than the Net Selling Price (NSP) of the relinquished property, but the property needs work/improvements.

The taxpayer can use the improvement exchange to equalize the exchange value by including the value of improvements made to the replacement property. Please contact us to discuss your specific situation as these transactions can be complex.

There are two types of 1031 Improvement Exchanges:

Standard 1031 Improvement Exchange 

SELL FIRST THEN BUY

In an improvement or construction 1031 exchange, the proceeds from the relinquished property sale are used to acquire the replacement property and make the desired improvements. This exchange is also known as a “Build-to-Suit” exchange.

The property must be held (parked) by an Exchange Accommodation Titleholder (EAT). The EAT must hold the property until either the improvements are completed, or the 180-day exchange deadline occurs. On or before the 180th day, the improved property must transfer to the exchanger as the replacement property.

Improvement Exchange Rules
  • Improvement exchanges have a 180-day deadline starting on the sale of the relinquished property.
  • Within 45 days of closing on the sale, the taxpayer must formally identify the replacement property(s) and desired improvements.
  • EAT must take title to the replacement property while the improvements are made. (If the taxpayer were to take title to the replacement property, the value of the improvements would not be sheltered in the exchange).
  • The EAT and the taxpayer must complete a Qualified Exchange Accommodation Agreement.

Reverse 1031 Improvement exchange

BUY FIRST THEN SELL

Reverse improvement exchanges allow the taxpayer to acquire the replacement property before closing on their relinquished property. These exchanges incorporate improvements to the replacement property to increase the property's value.

Reverse 1031 Improvement Exchange Rules
  • An EAT Exchange Accomodation Titleholder (EAT) must take title of the replacement property and hold the title while the improvements are made.
  • Reverse improvement exchanges have a 180-day deadline. The 180-day countdown starts on the date the EAT buys the replacement property for the taxpayer/seller.
  • Within 45 days after the purchase of the parked property, the taxpayer must formally identify the relinquished property.
  • The EAT and the taxpayer must complete a Qualified Exchange Accommodation Agreement.
FREE DIGITAL GUIDE

Download our 1031 exchange guide today. You'll have the opportunity to learn even more about timing, key terms, tax benefits of a 1031 exchange, and important rules or common misconceptions.

Schedule a Meeting


If you are looking to do a 1031 Exchange, schedule a meeting with our team to learn more.

What to expect in a 1:1 session with a 1031 exchange representative:
 
  • Get all your 1031 exchange questions answered
  • Tell us about your investment property, goals, and timelines to evaluate your options
  • Receive insight and education from our experienced 1031 exchange team

Getting Started with a 1031 Exchange


If you’re interested in doing a 1031 exchange with Equity 1031, please complete this form. A member of our team will then contact you within one business day to start your 1031 exchange.

Please note: you must set up your exchange before closing on your property. We request three to five business days to set up a Standard Exchange. Contact Equity 1031 Exchange for timelines on setting up a Reverse or Improvement Exchange.