3 Basic Options of a 1031 Tax Deferred Delayed Exchange
The DELAYED Tax Deferred Exchange:
The Exchange must be opened between an accommodator and your escrow company before the closing of any escrow. This allows the accommodator to assign themselves into the escrow as the qualified intermediary, pursuant to the IRS’ requirement.
You must identify the replacement property (property to be purchased) within 45 days after the close of the relinquished (sale) escrow. The accommodator will provide an identification form with a copy of the exchange agreement.
[Under the 3 property rule, the IRS allows you to identify up to a maximum of 3 replacement properties, or, under the 200% rule they may identify 4 or more properties. Under the 200% Rule – an investor may choose to identify more than three (3) replacement properties. If so, the aggregate fair market value (FMV) of all the replacement properties identified cannot exceed 200% of the relinquished property value (or sales price).]
You must close escrow on any or all of the replacement properties within 180 days from the close of the relinquished (sale) escrow.
The investor must reinvest all net proceeds into the replacement property. Should one choose to keep or use any proceeds, those monies could be taxable.
If applicable, the investor must also obtain a mortgage loan (debt) of equal or greater than the amount paid off on the relinquished property.
The REVERSE 1031 Tax Deferred Exchange:
Allows for the purchase of the replacement property to close escrow before the relinquished (sale) property escrow closes.
The relinquished (sale) property must be identified within 45 days, and the sale must close escrow no later than 180 days from the time title changes on either the sale or purchase property involved in the reverse 1031 tax deferred exchange.
The most important thing to consider with a reverse exchange is that the IRS does not allow the exchanger to hold title to both the replacement property and the relinquished (sale) property at the same time. The IRS requires a 3rd party to hold title to one of the properties involved in the reverse exchange. If there is a lender involved in the purchase of the replacement property, the Exchange Accommodation Titleholder will usually take title to the relinquished property to avoid any complications with the new loan. If no loan is needed to purchase the replacement property, then the Exchange Accommodation Titleholder will take title to the replacement property.
Just like a regular exchange, the accommodator will need to assign itself into both the Purchase and Sales Agreement. They will need to get a copy of the purchase and sale agreements, any escrow instructions, and the preliminary title report to prepare the exchange agreements and assignment.
The Hybrid 1031 Tax Deferred Exchange:
Allows you to combine all the sale(s) you can within a Delayed Exchange BEFORE closing your purchase. The accommodator will concurrently set up your purchase into both a replacement property for your Delayed exchange, AND set up the remaining balance of your purchase into a REVERSE exchange for the SALE of what you still need to sell. From that point you will have the 180 days to sell and close whatever you need to fulfill your exchange.
Should you choose to purchase yet another property into the exchange because you have further funds left over, you may by following the Delayed Exchange rules as seen above.
Exchange laws require explicit adherence to the rules and regulations which have been promulgated by the IRS and the various state taxing agencies throughout the country. We cannot give tax advice or legal advice and always recommend that a client talk with their CPA or tax attorney about their exchange.