Nevada City Virtual Tour

Thursday, May 24, 2012

Types of 1031 Exchanges Investor Update

I have good news for you if you are a real estate investor; rents are going up across the nation. In Philadelphia, rents are up 15% compared to last year, Chicago saw median rents rise 8.6% in the past 12 months and Minneapolis was up 10%.  In San Francisco the rental market is on a tear with crowds of potential tenants lining up to pay 15% more to rent this year versus last.  

Rising rents mean more attractive returns which is leading more  investors to the real estate market. In Southern CA, absentee buyers, investors and second home purchasers accounted for 28% of all home purchases last month.  The historical avearage is 19.2%. 

If you are a new real estate investor or a seasoned veteran, one thing for certain is that when it comes time to sell, you better have a firm understanding of how to protect your hard earned dollars from the tax man. 

  Types of 1031 Exchanges 

Real estate investors looking to 1031 Exchange have some flexibility in how they structure their transaction.  The Internal Revenue Code allows for the following four types of 1031 Exchanges:

Simultaneous Exchange
In a simultaneous exchange, the relinquished property is sold and the replacement property acquired on the same day, with concurrent closings. The simultaneous exchange is rare and investors should still use an Exchange Accommodator when doing a simultaneous exchange.

Delayed Exchange
The most common method of exchanging, the delayed exchange, allows investors to sell a property and then acquire replacement property within 180 days.

Reverse Exchange
The reverse exchange allows investors to acquire replacement property prior to selling.  The reverse exchange can be more complicated however, as investors cannot own both the new replacement property and (soon to be) relinquished property at the same time. An asset exchange company, as an Exchange Accommodating Titleholder will need to go on title to one of the two properties involved in the exchange. Investors considering a reverse exchange should contact Asset Exchange Company well in advance of closing on the replacement property.

Construction/Improvement Exchange
The construction exchange allows investors to use exchange proceeds to build on land or improve an existing property. The construction/improvement exchange is often used to acquire a 'fixer' and do improvements on the existing structure. The pitfall with a construction/improvement exchange lies in the fact that all exchange funds need to be spent on or before the 180th day of the exchange.


 1031 Exchange Language

When doing a 1031 Exchange, the law does not require that you insert specific 1031 Exchange language into the Purchase and Sale contract.  However, it is good business practice to do so. Below is a sample of the language that may be included in a sales contract:

Sale of Relinquished Property
"Buyer is aware that Seller intends to perform an IRC §1031 tax deferred exchange. Seller requests Buyer's cooperation in such an exchange and agrees to hold Buyer harmless from any and all claims, liabilities, costs, or delays in time resulting from such an exchange. Buyer agrees to an assignment of this contract to  asset exchange company  by the Seller."

Purchase of Replacement Property
"Seller is aware that Buyer intends to perform an IRC §1031 tax deferred exchange. Buyer requests Seller's cooperation in such an exchange, and agrees to hold Seller harmless from any and all claims, liabilities, costs, or delays in time resulting from such an exchange. Seller agrees to an assignment of this contract to an asset exchange company by the Buyer."

The law does require, however, that both parties to the contract must agree to an assignment of contract rights from the exchanging party to the Qualified Intermediary.  This is typically done with a written "Notice of Assignement" document signed by all parties. 

Gary Tippner is Short Sale and Foreclosure Resource Certified.

Call 1-877-311-GARY
"Eight Seven Seven Three Eleven... Gary"

ETF and Stock Expert Feed