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Learn more about the 4 types of 1031 exchange

Learn more about the 4 types of 1031 exchange

The term 1031 exchange implies bringing together two investors who want to exchange properties that have the same value. One of the benefits that come with this process is the fact that it helps investors defer paying certain capital gains taxes the moment they sell their property, as long another “like-kind” property is immediately afterwards bought with the money gained by the sale of the first one. They need to be in accordance with the terms Delaware Statutory Trust 1031 implies and they have to select the best type of 1031 exchange that matches their needs and budget. Here are more details about the different kinds of this type of transaction.

Simultaneous exchange

The simultaneous exchange allows investors to close a deal on a specific replacement property the very same day. You should know that originally, this is what the 1031 exchange actually implied – a direct swap of properties and transaction between two parties. However, times have changed and this type of transaction is not as commonly used as it was several years ago. The reason is quite simple – chances to find someone who is interested in the exact property you own and you be interested in the exact property they own in return are extremely low.

Delayed exchange

It is worth mentioning that the delayed exchange is the most popular 1031 one nowadays, since through it, investors are allowed to sell their properties first and then find a replacement one within a pre-established amount of time. In most cases, people have 45 days to find a replacement property, but things can differ depending on the country or the region they are making the exchange. For this reason, it is best to document yourself thoroughly before engaging in a process like this one in order to be aware of what to expect.

Reverse exchange

The reverse exchange is quite simple in theory: you buy a property first and then pay for it later. However, there is one thing that makes it complicated and that is the fact that the property is supposed to be bought in cash only and most banks will not lend you money for such an exchange. It is extremely difficult to get a loan in such situations since the investor cannot be on title to both the replacement and the relinquished properties simultaneously. Experts in the domain claim that one great solution to this issue is for the investor to create an LLC, which will take title to the replacement property. The moment you manage to sell your property, you can transfer the mentioned title into your name.

Construction exchange

The construction or improvement exchange is another popular option in the 1031 world. There are many cases in which investors sell their properties and realize that the ones they bought or are interested in buying do not have the same value as theirs, but rather a lower one. In such cases, they can still do the exchange and then invest the remaining funds into wither the construction or the improvement of the property.