Exchange Types…
Delayed Exchange…
A delayed exchange is the most commonly used exchange type. It provides investors the flexibility of up to a maximum of 180 days to purchase a replacement property. The use of a Qualified Intermediary is required to complete a valid delayed exchange. The Qualified Intermediary prepares the necessary exchange documents to assist the Exchangor with meeting the many detailed requirements of the Code, as well as avoiding numerous destructive pitfalls.
Sale of the Relinquished Property
Prior to closing the sale of the relinquished property, the Exchangor enters into the Exchange Agreement with Pioneer 1031 Company. Pursuant to the Exchange Agreement, an Assignment is executed prior to closing, and Pioneer 1031 Company assumes the Exchangor’s Purchase and Sale agreement. Pioneer 1031 Company instructs the closing/escrow officer or closing attorney to directly deed the property from the Exchangor to the buyer. Proceeds are transferred directly to the Qualified Intermediary, thereby protecting the Exchangor from actual or constructive receipt of funds. A separate interest bearing account will be set up for the exchange funds.
Purchase of Replacement Property
The Exchangor has 45 days to identify “like-kind” replacement property plus an additional 135 days to acquire property, which is on the identification list, for a total of 180 calendar days in the exchange. The exchange period begins when the deed records on the relinquished property and ends on the 180th day, or the exchangor’s tax filing date whichever is earlier. Prior to closing on the replacement property, the Exchangor assigns the Purchase and Sale Agreement to the Qualified Intermediary. After the Assignment is executed, the exchange is completed when the Qualified Intermediary purchases the replacement property with the exchange proceeds. The property is transferred to the Exchangor by a direct deed from the seller.
Reverse & Build-to-Suit Exchanges…
A reverse exchange occurs when a Taxpayer wants to acquire replacement property prior to the disposition and sale of the relinquished property. Although common terminology calls this type of transaction a “reverse exchange,” the Taxpayer (also referred to as the “Exchangor”) does not actually acquire the replacement property first and dispose of the relinquished property later. Instead, the Taxpayer must arrange for an Exchange Accommodation Titleholder (or “P.E.A.T.”) to take title to the replacement property.
In a reverse exchange, the P.E.A.T. acquires title to the replacement property. It is important to note that a reverse exchange must be set up and structured with an P.E.A.T prior to the replacement property closing.
- The P.E.A.T. acquires title to the replacement property at the scheduled closing. The acquisition is funded by the Taxpayer and/or a third party lender.
- The P.E.A.T. leases the replacement property to the Taxpayer, and the lease provides that the Taxpayer receives all of the income and pays all of the expenses of the replacement property.
- Once a third party buyer is found for the relinquished property, the relinquished property is transferred to the buyer and the relinquished property proceeds are transferred to the Qualified Intermediary.
- After the relinquished property has been transferred to the buyer, the Taxpayer acquires the replacement property held by the P.E.A.T. using the exchange funds (the net proceeds from the sale of the relinquished property). If there are remaining exchange funds, the Taxpayer may acquire additional replacement properties as part of a new delayed exchange, provided that they were properly identified.
Reverse Exchange Requirements
- Most rules that apply to tax-deferred exchanges also apply to reverse exchanges.
- The Taxpayer has 45 days from the first closing to identify the relinquished property(ies). The timeframes begin on the day the P.E.A.T. takes title to the replacement property.
- Reverse exchanges under the IRS safe harbor rules must be completed within 180 days.
- All of these transactions must be set up as an exchange, rather than as a sale followed by a purchase.
- The Taxpayer must comply with Revenue Procedure 2000-37 (Rev Proc 2000-37) to satisfy a safe harbor reverse exchange.
Improvement / Build-to-Suit Exchange
An improvement exchange occurs when the Taxpayer wants to acquire replacement property and build improvements on it during the exchange period. This usually occurs when the Taxpayer determines that he will have exchange funds in excess of the cost of the replacement property. The excess equity is used to construct improvements on the replacement property.
- Within 45 days after the relinquished property is transferred to the buyer, the Taxpayer must identify the replacement property including the improvements that will be constructed on the property.
- The acquisition of the replacement property, and all identified improvements, must be completed within 180 days. Nevertheless, the only property that is considered “like-kind” for exchange purposes will be property that is considered to be real property, i.e., attached to the land or building.
- In an improvement exchange, the P.E.A.T. holds title to the replacement property, but the construction may be managed by the Taxpayer.