Bankers Exchange Services

Simultaneous

Prior to 1984, when Congress modified the code on exchanges and formally approved the Starker concept of delayed exchanges, virtually all were of the simultaneous type. To qualify as a simultaneous exchange, both the ownership of the relinquished property and the replacement property must close or transfer at the same time. Some Real Estate agents and also some investors still try to accomplish simultaneous exchanges, primarily to avoid the payment of fees to an intermediary. There is significant danger in this attempt since many unforeseen events can cause the closing and recordation to be delayed on one of the properties, leaving the investor with a failed exchange and the obligation of income taxes that would otherwise have been deferred. For example, if the properties are located in different counties, it is highly unlikely that the transfers of title will take place on the same day. If two different settlement agents are involved, it is virtually impossible for both to have the funds to close on the same day. Additionally, in directing the settlement agent to disburse funds for the purchase of the replacement property, it could be contended successfully by the IRS that the investor had constructive receipt of the proceeds of the sale, and therefore income taxes on the gain would be due. The regulations under Section §1031 provide a Safe Harbor for simultaneous exchanges where a qualified intermediary is used.

Delayed

Generally, when one discusses exchanges, the type of exchange referred to is the delayed, or Starker exchange. This is the most common type of exchange and there are several types of delayed exchanges which will be discussed herein. In the exchange, the relinquished property is sold at Time 1, and the replacement property is acquired at Time 2.

Improvement & Construction

In some cases, the replacement property is unimproved land or an existing building which requires construction to complete improvements. New construction or improvements can be added as part of the exchange with title passing to an Exchange Accommodation Titleholder and the intermediary making payments to contractors and other suppliers out of the exchange funds. Thus, if the replacement property is of lesser value than the relinquished property, the improvement or construction costs can bring the value up to an amount which is equal to or exceeding that of the relinquished property.

Reverse

The reverse exchange is one in which the investor finds the replacement property and wants to acquire it before the relinquished property is sold. Since the investor cannot buy the property and later exchange into property that is already owned, a reverse exchange becomes an option. In a reverse exchange, an Exchange Accommodation Titleholder acquires the replacement property and warehouses it until the relinquished property sells, at which time a delayed exchange is structured. It also may be possible for the EAT to become an interim or straw buyer for the relinquished property until such time that the ultimate buyer acquires title which must occure within 180 days from when the EAT takes title. In either event, there are exchange possibilities for investors who have located the replacement property before their relinquished property is sold. In 2000 the IRS issued Revenue Procedure 2000-37, which established a Safe Harbor for reverse exchanges. Reverse exchanges are now a very popular option for taxpayers considering a 1031 exchange.

Business & Personal Property

Internal Revenue Code Section 1031 permits the exchange of property other than Real Estate. For example, investors may exchange business assets, valuable paintings, livestock or other personal property. Therefore, business or business asset exchanges are common. While the basic rules are the same, the sales price of the business must be allocated among the asset classes (there are 13 in total) as set forth in the regulations.

Bankers Exchange Services has offices in Walnut Creek and Oakland and serves the Greater Bay Area and in particular, the East Bay region and will gladly facilitate your real estate 1031 exchange transaction anywhere in the United State or US Territories.  Bankers Exchange Services also offers specialized expertise in the following communities: