Most real estate investors are familiar with the 1031 Exchange (Tax-Deferred Exchange). The 1031 Exchange is perhaps one of the most powerful tax deferral strategies available to taxpayers. The goal being: to never pay income taxes on the sale of property by reinvesting the proceeds into similar or "like-kind" property.
There are several ways to structure a tax-deferred exchange under Section 1031 of the Internal Revenue Code. Listed below are a few examples:
A Simultaneous Exchange is an exchange in which the closing of the relinquished (sold) property and the closing of the replacement (purchased) property occur simultaneously.
A Delayed Exchange occurs when the closing for the replacement property occurs at a later date than the closing of the relinquished property. This is more commonly referred to as a "Starker Exchange."
An Improvement Exchange is an exchange in which the taxpayer contracts for the purchase of a property and arranges for the construction of improvements on the property before it is designated as the replacement property.
A Reverse Exchange is an exchange in which the replacement property is purchased and closed before the relinquished property is sold.
The 45-day (to designate) and 180-day (total within which to close) rules and the designation rules (Three-property Rule, 200% Rule or 95% Rule) apply to every type of exchange and all exchanges require the services of a qualified intermediary services provider.
However, the focus here is Reverse Exchanges. Reverse Exchanges occur when a taxpayer closes escrow on a replacement property (title held by Exchange Accommodation Titleholder, usually the Qualified Intermediary) prior to actually closing the sale of the relinquished property. Sometimes the Exchange Accommodation Titleholder will take and hold title to the relinquished property until a buyer is found. This option is great for investors looking to expand their portfolio, while at the same time having the option to sell off an asset if presented with a great offer.
Reverse Exchanges can also be used in circumstances where the taxpayer wants to acquire a property and construct improvements on it before taking title to the property as the replacement property. This can be tricky since construction and entitlement issues may challenge your ability to comply with the 180-day rule for closing.
In a dynamic and highly-competitive investment real estate market, such as what we have seen locally in recent times, Reverse Exchanges may become the transaction structure chosen by more investors. The dilemmas of "What do I buy if I sell?" or "I would love to own that investment property if I sell the one I now have!" can be somewhat alleviated. Investors, Realtor/Agents and anyone involved in counseling real estate investors should learn as much as they can about these powerful tax-deferral strategies. I recommend that all investors should keep an eye out for good deals at all times and keep up to date regarding the value and market potential of their real estate assets.
Ben Calamore works with Whaley Properties of Keller Williams/Carlsbad. He has over 20 years experience in commercial and investment real estate, and has handled the sale of office buildings, residential income properties, land, retail properties and upscale coastal homes. He can be reached at (760) 496-7950 or [email protected].
There are several ways to structure a tax-deferred exchange under Section 1031 of the Internal Revenue Code. Listed below are a few examples:
A Simultaneous Exchange is an exchange in which the closing of the relinquished (sold) property and the closing of the replacement (purchased) property occur simultaneously.
A Delayed Exchange occurs when the closing for the replacement property occurs at a later date than the closing of the relinquished property. This is more commonly referred to as a "Starker Exchange."
An Improvement Exchange is an exchange in which the taxpayer contracts for the purchase of a property and arranges for the construction of improvements on the property before it is designated as the replacement property.
A Reverse Exchange is an exchange in which the replacement property is purchased and closed before the relinquished property is sold.
The 45-day (to designate) and 180-day (total within which to close) rules and the designation rules (Three-property Rule, 200% Rule or 95% Rule) apply to every type of exchange and all exchanges require the services of a qualified intermediary services provider.
However, the focus here is Reverse Exchanges. Reverse Exchanges occur when a taxpayer closes escrow on a replacement property (title held by Exchange Accommodation Titleholder, usually the Qualified Intermediary) prior to actually closing the sale of the relinquished property. Sometimes the Exchange Accommodation Titleholder will take and hold title to the relinquished property until a buyer is found. This option is great for investors looking to expand their portfolio, while at the same time having the option to sell off an asset if presented with a great offer.
Reverse Exchanges can also be used in circumstances where the taxpayer wants to acquire a property and construct improvements on it before taking title to the property as the replacement property. This can be tricky since construction and entitlement issues may challenge your ability to comply with the 180-day rule for closing.
In a dynamic and highly-competitive investment real estate market, such as what we have seen locally in recent times, Reverse Exchanges may become the transaction structure chosen by more investors. The dilemmas of "What do I buy if I sell?" or "I would love to own that investment property if I sell the one I now have!" can be somewhat alleviated. Investors, Realtor/Agents and anyone involved in counseling real estate investors should learn as much as they can about these powerful tax-deferral strategies. I recommend that all investors should keep an eye out for good deals at all times and keep up to date regarding the value and market potential of their real estate assets.
Ben Calamore works with Whaley Properties of Keller Williams/Carlsbad. He has over 20 years experience in commercial and investment real estate, and has handled the sale of office buildings, residential income properties, land, retail properties and upscale coastal homes. He can be reached at (760) 496-7950 or [email protected].