Types of Exchanges
Simultaneous
Simultaneous Exchange: The exchange of the relinquished property for the replacement
property occurs at the same time.
Except in the literal exchange of deeds, little guidance is available on what constitutes
a "simultaneous" exchange. In some respects, the question of whether a transaction
is a simultaneous exchange was made a historical anachronism by the Tax Reform Act
of 1984 which added IRC § 1031 to permit deferred exchanges, and was made even less
relevant by the 1991 adoption of the final deferred exchange regulations. Although
simultaneous exchanges are theoretically possible in modern practice, the deferred
exchange definition in Reg §1031, ("an exchange in which, pursuant to an agreement,
the taxpayer transfers property held for productive use in a trade or business or
for investment (the 'relinquished property') and subsequently receives property
to be held either for productive use in a trade or business or for investment (the
'replacement property')") has the capacity to subsume the exception with the rule.
Delayed Exchange: This is the most common type of exchange. A Delayed
Exchange occurs when there is a time gap between the transfer of the Relinquished
Property and the acquisition of the Replacement Property.
A Delayed Exchange will qualify for like-kind exchange treatment under IRC §1031
if:
- It otherwise meets the requirements for a valid simultaneous exchange; and
- It meets the additional statutory and regulatory requirements specifically applicable
to deferred exchanges under IRC §1031(a)(3) and Reg §1.1031 (k)-1. As noted in a
simultaneous exchange most like-kind exchanges fit the definition of deferred exchanges
under IRC §1031 and Reg §1.1031(k)–1.
In a typical exchange, the taxpayer enters into a sale agreement with a buyer of
the relinquished property and may or may not enter into a purchase agreement with
the seller of the replacement property. Indeed, the taxpayer might not even identify
the replacement property. Nevertheless, §1031 permits the taxpayer to close with
the buyer, i.e., convey title to the relinquished property to the buyer, in anticipation
of receipt of a replacement property. Moreover, Reg §1.1031(k)–1 provides detailed
guidance on certain transactional parameters that, if followed, will permit the
taxpayer to obtain like-kind exchange treatment if the replacement property is identified
within 45 days after the taxpayer’s transfer of the relinquished property and the
replacement property is transferred to the taxpayer within 180 days after the transfer
of the relinquished property.
Reverse Exchange: A situation where the replacement property is
acquired prior to transferring the relinquished property. The IRS has offered a
safe harbor for reverse exchanges, as outlined in Rev. Proc. 2000-37, effective
September 15, 2000. These transactions are sometimes referred to as "parking arrangements".
This procedure greatly expands the ability of the investor to take advantage of
changes in the marketplace and to improve the investors position.
There are two varieties of reverse exchanges:
- In a true reverse exchange, the replacement property is actually conveyed to the
taxpayer before the taxpayer's conveyance of the relinquished property; and
- In a "parking" or "accommodation" reverse exchange, either the replacement property
is temporarily "parked" with an accommodation party until the taxpayer is ready
to sell or the accommodation party buys the replacement property and immediately
exchanges it with the taxpayer for the relinquished property, holding the latter
until it is sold.
The reasons taxpayers may need or wish to explore the availability of reverse exchanges
include:
- There may be unexpected delays in the taxpayer's ability to complete a transfer
of relinquished property in what was intended to be a simultaneous or deferred exchange.
- The taxpayer may need to complete a desirable purchase before being able to market
or arrange a transfer of a property that will become relinquished property in a
like-kind exchange.
- By having replacement property unconditionally available for acquisition from a
cooperative party immediately following disposition of a relinquished property,
taxpayers avoid any risk of failing to meet the identification or exchange period
requirements of IRC §1031(a)(3)
.
Timelines still apply to the Reverse exchange process and if considered, should
be discussed well in advance with a Rocky Mountain Exchange Consultant.
Build-to-Suit (Improvement or Construction) Exchange: This technique allows the
taxpayer to build on, or make improvements to, the replacement property, using the
exchange proceeds. The intermediary acquires and retains ownership to the replacement
property while construction or improvements are made, upon completion of which,
the intermediary trades the improved property for the property the Exchangor is
relinquishing.
Certain restrictions apply and should be discussed with a Rocky Mountain Consultant
Personal Property Exchange: Exchanges are not limited to real property.
Personal property can also be exchanged for other personal property of like-kind
or like-class.
Practitioners must analyze the type of assets proposed to be exchanged. Practitioners
must preliminarily ascertain whether the assets qualify for like-kind exchange treatment
at all. In multiple asset exchanges, whether otherwise qualifying assets, e.g.,
assets not explicitly excluded from like-kind exchange treatment under IRC §1031(a)(2),
are of "like-kind" to replacement assets. If the exchange involves undeveloped land,
for example, the attendant analysis is relatively simple; but if the transaction
involves the exchange of businesses, the analysis can be quite complex.
The first litmus test to apply is the separation of real and personal property assets
involved in the exchange. Many exchanges predominantly involving real estate still
require consideration of the rules governing multiple assets because personal property
is usually involved.
Multi-Party/Multi-Property Exchange: An exchange technique that
allows the taxpayer to acquire multiple replacement properties from one individual
relinquished property, or consolidate multiple relinquished properties into one
replacement property.
All exchange transactions are subject to time limits, which are set forth in the
Treasury Regulations. Any consideration to perform a tax deferred exchange should
be discussed with the investors tax and/or legal counsel as well as a Rocky Mountain
Exchange Consultant.