I need to maximize my reinvestment. What are my 1031 Exchange options as a solution?

A 1031 exchange, commonly referred to as a delayed exchange, is a tax-deferred strategy used in real estate investment. It allows landowners to sell a property and then reinvest the proceeds into another “like-kind” property without recognizing capital gains taxes at the time of the exchange.  The transfer of properties between the qualified intermediary (QI) and the taxpayer constitutes an exchange, not a simple sale and purchase.

Safe Harbor Exchanges:

Forward Exchanges:

In a standard, forward 1031 exchange the taxpayer is relinquishing (the “sale”) property then acquiring replacement ( the “purchase”) property. The taxpayer and qualified intermediary (QI) establish an exchange agreement prior to closing a sale transaction. The taxpayer transfers their rights to sell the relinquished property to the QI, who acts as the property seller and holds the funds in an exchange account for the taxpayer’s benefit. The benefit being that the taxpayer is not found to be in constructive receipt of funds. Constructive receipt of funds would invalidate the exchange. Within the initial 45 days of the overall 180 day exchange window, the taxpayer identifies potential replacement properties. Once replacement property or properties are under contract, the rights to acquire it are transferred to the QI through assignment. The taxpayer must complete the purchase within 180 days of selling the relinquished property. The funds held in the exchange account are then sent directly to the closing agent, concluding the exchange and allowing the taxpayer to receive their tax-deferred property.

Reverse “Parking” Exchanges:

A reverse, also referred to as a parking, exchange is the solution when a taxpayer is in the position where they either need or want to secure new real estate prior to selling their current property.  A base rule of 1031 exchanges is that the taxpayer is unable to own both the relinquished and replacement property simultaneously. Therefore a holding, or special purpose entity (SPE) is prepared. The parking entity, referred to as an Exchange Accommodation Titleholder (EAT) and a Qualified Exchange Accommodation Agreement (QEAA) will be created and registered through our available services. The parking entity will then essentially step into the exchanger’s shoes to acquire the replacement real estate and hold temporary title of the property until the exchanger’s sale closes. Once this is completed, a transfer of deed or membership of the parking entity will be shifted to the taxpayer to appease the replacement portion of the forward exchange. Like a forward exchange, this is completed within the 180 day window which was triggered to begin the day replacement property was obtained. These are most often utilized due to competitive real estate markets and timing. However, other reasons for a reverse include ongoing business and financial considerations. Reverse exchanges are more complex and your QI should be involved in all steps and planning to ensure it is completed in accordance with IRC § 1031.

But, what if…

If the taxpayer has multiple moving pieces, for instance, where the taxpayer has two sales and one purchase but one sale occurs, then a purchase and lastly, another sale. What is the solution? Don’t stress out! Just contact us today to discuss those particulars and assist  crafting potential solutions.

Improvement and Build-to-Suit “Construction” Exchanges:

A Build-to-Suit Exchange (BTS) is where the exchanger purchases land to build the desired structure as the replacement property. Improvement exchanges is when the exchanger is purchasing replacement property with the intent to improve the structure. Once the exchanger takes title to the property, any improvements are considered payment for labor and materials and such payment is not the purchase of like kind property. Taxpayers seeking to develop or renovate property they wish to include in a 1031 exchange cannot count existing improvements on land they already own as part of the exchange. To address this, the exchanger opts for a construction exchange, allowing them to receive customized property within the exchange. These exchanges, which can be forward or reverse, involve a qualified intermediary (QI) holding proceeds from the sale of the relinquished property. Through a separate agreement with an exchange accommodation titleholder (EAT), the funds held with the QI are used to purchase the replacement property. Within 180 days of the sale, while the replacement property is held by the EAT, construction can take place. Funds for improvements can be requested through draw requests to the QI and EAT. This is one of the most common reasons a construction exchange is utilized, to maximize all exchange funds. If exchange funds are insufficient, the taxpayer may contribute additional funds or secure a loan. Other reasons include having the property meet specific criteria for the use of the property, competitive real estate markets and cost savings. In a safe-harbor transaction, the improved property is transferred to the taxpayer within the standard 180 day timeframe.

Non-Safe Harbor Exchanges:

The Internal Revenue Code (IRC) has crafted guidelines to be satisfied by taxpayers when completing a 1031 exchange. Remaining within the guidelines ensures that the taxpayer has a lower audit risk due to operating within the “qualified zone”. Hence its name, safe harbor exchanges. Whereas a Non-Safe Harbor exchange is facilitated when the exchanging individual or entity operates outside of the guidelines, therefore generating a higher risk. With these exchanges, you normally see closings occur past the 180 day deadline.

Forward, Parking/Reverse and Construction Exchanges are available through Land 1031 in a non-safe harbor manner. Contact us today to find out how!

The information presented is for information purposes and is not intended as investment, legal, tax or compliance advice. Land 1031 does not offer or sell investments or provide investment, legal, or tax advice.

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