There are basically four types of exchanges that qualify for Section 1031 treatment. The most common like-kind exchange types include the simultaneous, delayed, reverse, and construction/ improvement exchange. Continue reading to learn more about each type of exchange.
1 – Simultaneous Exchange
This allows investors to relinquish and close on a replacement property on the same day. Originally, this is what a 1031 exchange was–a direct exchange between two parties.
Today, this type of exchange isn’t very common. Why? Because what are the chances that the person who owns the exact property you want also wants the exact property you own? It can happen, but the possibility is pretty slim.
2 – Delayed Exchange
The delayed like-kind exchange is by far the most common type of exchange chosen by investors today. This type of exchange gives investors a maximum 180 days after the sale of their property to identify replacement property.
We’ll discuss the rules associated with a Delayed Starker Exchange in the next section.
3 – Reverse Exchange
In theory, the reverse 1031 exchange is very simple: you buy first and you pay later. What makes it difficult, however, is that this type of exchange must be an all cash purchase AND most banks won’t lend to you. Why is it so difficult to get a loan? It’s because you cannot be on title to the replacement and the relinquished property at the same time.
The solution: you can create an LLC that can take title to the replacement property. Once you sell the original property, you can transfer the title of the replacement property into your name.
4 – Construction/Improvement Exchange
There are a lot of investors that sell a property, and realize that the one they want to buy costs less than the one I relinquished.
What do you do? Well, since paying taxes is out of the question…you might consider doing a Construction or Improvement Exchange.
This type of exchange allows you to use the remaining funds to build or improve on the property you want to buy.