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TYPES OF EXCHANGES

There are a number of different types of 1031 exchanges that will qualify for tax deferment- each with their own rules and timeframes. These include:

DELAYED EXCHANGE – This is the most common type of exchange. The investor will sell (relinquished) property first, then purchase replacement property.

SIMULTANEOUS EXCHANGE – This is when the replacement property and the relinquished property close within a 24 hour period.

PARTIAL EXCHANGE – While it makes sense for investors to reinvest as much of the sale proceeds as possible to avoid the greatest amount of tax, it is not a requirement to invest all of it and that is where the partial exchange comes in. However, the uninvested amount, termed ‘BOOT’, immediately becomes subject to capital gains and other taxes.

BUILD-TO-SUIT/IMPROVEMENT EXCHANGE – The build-to-suit exchange allows you to structure a 1031 exchange transaction where you can sell your relinquished property and use the proceeds from the sale of your relinquished property to acquire replacement property. It also allows you to use any excess sale proceeds to improve the acquired replacement property as part of your 1031 exchange transaction. The proceeds from the sale of your relinquished property that are used toward the acquisition of your replacement property as well as those proceeds that are paid or used for improvements to your replacement property will qualify for tax-deferred exchange treatment provided the transaction is structured properly as a build-to-suit exchange.

REVERSE EXCHANGES – this exchange occurs when the new or replacement investment property is purchased before the relinquished property is sold.