By Dean ‘Mac’ Nichols, Attorney
A 1031 tax-deferred exchange is a real estate exchange that gives investors the ability to defer the capital gains tax typically associated with selling real estate held as an investment or used for business purposes. In order to qualify as a deferred exchange, there must be an exchange of real estate for real estate as opposed to a sale by the taxpayer and then a purchase of other real estate by the taxpayer.
There are several different types of 1031 exchanges, and this post will look at two of the more common types of 1031 exchange: a forward exchange, and a reverse exchange.
A forward or delayed exchange is the most common type of exchange. In this exchange, the relinquished property is sold, and another property called the replacement property is purchased. In order to qualify for this kind of exchange, the replacement property must be identified within 45 days of closing on the relinquished property, and closed on within 180 days of the relinquished property closing. A forward exchange must be facilitated by a Qualified Intermediary, with the sale proceeds held by that person between the sale of the old property and the purchase of the new.
A reverse exchange is a 1031 exchange in which the replacement property must be purchased before the relinquished property has been sold, and the whole transaction is completed within 180 days of the replacement property purchase. In a reverse exchange, an exchange accommodation title holder (EAT) is used to hold the replacement property until the relinquished property is sold. A forward exchange is then accomplished on the sale of the relinquished property. A reverse exchange is more complicated because it involves a transaction with the EAT in addition to the forward exchange with the Qualified Intermediary.
When choosing what type of exchange works for you, knowing your options can help you decide the best way to structure your transactions so as to maximize the benefits.
