Options for a 1031 Exchange
Property owners looking to utilize a 1031 Tax Deferred Exchange have three options available to them. It is highly recommended that you seek professional tax and legal advice prior to proceeding with any of these options.
Delayed (or Starker) Exchange: the most commonly used method of performing a 1031 exchange. This option allows you to close on the relinquished property before closing on the replacement property. Before the relinquished property is sold, the intention of completing a 1031 exchange with the property must be declared, and an exchange agreement must be made between the interest party and a qualified intermediary (QI).
You have 45 days from the date the relinquished property closes to “Identifyâ€? potential replacement properties. The 45 day must be strictly adhered to; no extensions are allowed. After a property has been identified, you have 180 days from the closing of the property you are selling to close on the property you are purchasing. If you don’t the exchange is off, and you pay the capital gains tax.
Simultaneous Exchange: properties are transferred concurrently, having to close at the same time in order to avoid constructive receipt of the sale proceeds.
Reverse Exchange:The IRS has only recently given the green light on this type of option exchange and it is by far one of the more complicated and involved processes. This exchange method allows you to purchase the replacement property before the relinquishing property is closed. Basically, a single purpose limited liability company is formed, called the “Holding Entity�, which takes possession of the replacement property until such time as the relinquished property is closed. The IRS requires that the transaction be completed within 180 days of closing on the replacement property.