1031 Exchange Types
A Breakdown of 1031 Exchange Types
While a forward exchange is the most common type of exchange, some situations call for a reverse exchange, construction exchange, or simultaneous exchange in order to defer capital gain taxation when relinquishing one property and acquiring another.
A standard 1031 exchange (also known as a “deferred exchange”, “forward exchange”, or “Starker exchange”) occurs when a person sells property and uses a qualified intermediary to hold the funds until purchasing a replacement property. The replacement property must be identified within 45 days of the initial sale and the transaction completed within 180 days to qualify as a 1031 exchange.
A reverse exchange occurs when the replacement property is acquired before the sale of the relinquished property. When that happens, the replacement property (rather than funds) is “parked” using a qualified intermediary. Title to the replacement property is held by an entity created by the qualified intermediary known as an exchange accommodation titleholder or “EAT.” While it’s most common for the EAT to hold the replacement property (the property you are buying), the EAT is sometimes used to instead hold relinquished property (the property you are selling).
In reverse exchanges, the relinquished property being sold must be identified within 45 days of purchasing the replacement property and the reverse exchange must be completed within 180 days. We highly recommend consulting a real estate attorney or tax attorney before beginning a reverse exchange, as they are much more complex than a standard 1031 exchange.
There are times when a property owner wants to use the funds from a sold property to acquire replacement property and do construction to improve the replacement property. In this situation, a construction exchange (a/k/a an improvement exchange) is used. In a construction exchange, the replacement property is parked with an exchange accommodation titleholder (an “EAT”) while the improvements are made. Like reverse exchanges, construction exchanges are more complex and costly than a standard 1031 tax deferred exchange.
Similar to a deferred exchange, the replacement property (along with the anticipated improvements) must be identified within 45 days of selling the relinquished property and the exchange completed within 180 days. We recommend consulting a real estate attorney or tax attorney before pursuing a construction exchange.
A 1031 simultaneous exchange is the original version of a 1031 exchange where two pieces of property are exchanged or traded directly. In many cases, two property owners simply trade land and a qualified intermediary is not needed. However, we advise consulting with a real estate attorney or tax attorney before beginning a simultaneous exchange.
Why choose a local qualified intermediary?
While 1031 exchanges can be used in real estate investing, they’re also commonly used for family-owned farms and ranches. Our team understands the needs of Oklahoma farmers and landowners, and we’re committed to supporting the local community. Our team of professionals is local to Oklahoma, and your funds will be safely held in an Oklahoma bank.
How our
process works for forward exchanges
Our goal is to make the 1031 exchange process simple and smooth. Whether you’re exchanging family-owned land or commercial properties, our team is here to walk you through each step and answer any questions along the way.
The process below applies to most standard exchanges, also known as forward exchanges. Others types of exchanges may require additional steps, but our team is always here to guide you through the process.
We’ll discuss the process, talk about your specific transactions, and answer any questions you have about a 1031 exchange.
When you’re ready to sell your property, our team sends instructions to the title company to make closing an easy process for you. Prior to (or at) closing, you will execute an exchange agreement that officially “hires” Great Plains 1031 as your qualified intermediary.
The closing of your sale will proceed mostly as normal, but all proceeds from the sale (after payment of any debts and expenses) will be placed into a 1031 account to be held until the acquisition of your replacement property.
After your property is sold, you have 45 days from the closing of that sale to identify replacement property to be purchased as part of the 1031 exchange. There are specific rules for how many properties can be identified, the type of property that can be identified, and who must receive the identification. Great Plains 1031 is here to work with you and your advisors to make sure your identification of replacement property is done correctly.
Replacement property must be purchased within 180 days from the closing of the sale of your relinquished property. Great Plains 1031 will provide closing instructions to the title company prior to closing. At closing, Great Plains 1031 will advance any 1031 proceeds being held, and the replacement property will be deeded directly to you.
After replacement property is acquired, the exchange must be reported by your accountant or CPA on your next income tax return. This is done by completing IRS Form 8824 and including it with your income tax return. This step is not completed by Great Plains 1031, but we are happy to help answer any questions that arise when the exchange is reported.
Get in touch with our team
Our team at Great Plains 1031 has extensive experience helping Oklahoma real estate investors and landowners navigate all types of 1031 exchanges. We work closely with you and your existing team of tax and financial advisors to ensure a smooth transaction that enables you to defer capital gains taxation.
Contact us today to schedule a consultation.