Simultaneous – When both relinquished and replacement properties close escrow the same day*
Delayed – After the relinquished property has closed escrow, the replacement property must be identified within the first 45 days, and purchased within 180 days*
Reverse – Allows the purchase of the replacement property before the selling of the relinquished property.  The relinquished property must be identified within 45 days after escrow has closed on the purchase property, and must close escrow no later than 180 days.*
Build to Suit – Allows the taxpayer to construct improvements on the replacement property during the course of the exchange.*
Personal Property – An exchange involving personal property, (e.g. airplane for an airplane, boat for a boat or a restaurant business for a restaurant business), to be used for investment or the productive use in a trade or business*

*Each type of exchange involves special rules and requirements promulgated from the IRS.  An experienced Intermediary should be employed to facilitate such transactions to assure proper handling and tax deferral by the IRS.  Remember, all 1031 Tax-Deferred Exchanges must be set up prior to the close of Escrow.  Days are defined as Calendar Days and not Business Days or Holidays.

The newly issued Revenue Procedure (REV. Proc.2000-37) provides a safe harbor for reverse exchanges entered into on or after September 15, 2000 provided the taxpayer does the following:
   1. The safe harbor allows a taxpayer to treat the Exchange Accommodation Titleholder (EAT) as the beneficial owner of the property for federal income tax purposes.  The parked property must be held under a Qualified Exchange Accommodation Agreement.
   2. The EAT must hold legal title or similar ownership to the property being parked.
   3. The taxpayer must have the intent to park with EAT either the relinquished or the replacement property as part of a 1031 Tax Deferred Exchange.
   4. No later than five (5) business days after the transfer of ownership of the property to the EAT, the taxpayer and EAT must enter into a written agreement indicating that this is an exchange and that he accommodating party will be treated as the owner of the property for tax purposes.
   5. Within 45 days after the transfer of ownership of the replacement property to the EAT, the taxpayer must identify the property to be relinquished.
   6. No later than 180 days after the transfer of ownership of the property (replacement or relinquished) to the EAT, the replacement property must be transferred to the taxpayer or the relinquished property to the ultimate buyer.

An EAT that satisfies the requirement of a Qualified Intermediary under the regulations, may also enter into an exchange agreement with the taxpayer to serve as the Qualified Intermediary in a simultaneous or deferred exchange.  The taxpayer can guarantee some or all of the obligations of the EAT, including secured or unsecured debt incurred to acquire the replacement property.  The taxpayer can also loan or advance funds to the EAT.  The parked property can be leases by the EAT to the taxpayer or enter into a property management agreement with the taxpayer.

Should You Sell or 1031 Exchange?

Whether an investor owns a property all cash or with leverage, the benefits of tax deferral are significant.  The tax dollars saved can be utilized to purchase additional property.  The example below shows the significant advantage of exchanging for an investor who sells a $425,000 property that has been fully depreciated and that was debt-free.  This assumes the client is subject to a combined Federal and State Tax Bracket of 35%.  The investor who executed a property 1031 Tax Deferred Exchange defers the payment of capital gain taxes as well as recapture of depreciation taxes…
 
            Sale                                                       1031 Exchange
                                  Net Equity (Minus Cost)
       $400,000                                                      $400,000
                                        *Taxes (37%)
       $152,000                                                      None
                                     Funds to Reinvest
       $248,000                                                      $400,000

If the investor leverages his new property to 70% by putting 30% down, he could purchase properties totaling:    

                              Approximate Acquisition Value
       $833,000                                                      $1,300,000

By doing a 1031 Tax Deferred Exchange, the investor increased his portfolio by $467,000.  More than if one sold and subsequently reinvested with after-tax dollars.  This creates a better sale for the investor.

Primary Residence Under IRC §121

This information is provided for education purposes only. Parties should always contact competent legal and financial counsel to detemrine proper legal and financial remedies.