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1031 Exchange Types

There are fundamentally two types of 1031 exchanges that apply to all 1031 exchanges. The forward 1031 exchange and the reverse 1031 exchange with the only difference being which property is closed first, the old or the replacement property.

Forward 1031 Exchange

In a forward 1031 exchange the relinquished or old property is closed before the acquisition of the replacement property.

Leasehold Improvement Exchange

Building on land already owned is a leasehold improvement exchange. At least six months prior to the exchange, the property to be improved is conveyed to a related party. The related party enters into a 30 year, 180 calendar day lease with an Exchange Accommodator Titleholder (EAT). The EAT makes the improvements with funds provided by the Exchangor. Then conveys the lease to the Exchangor. The related party owns the ground and continues the lease for at least two years collecting fair market ground rent from the Exchangor.

Like Kind 1031 Exchange

Tangible and intangible personal property are eligible for 1031 exchanges given the property is like kind or like class. Thirteen general asset classes and the North American Industry Classification System categorize tangible assets into classes. Unallocated gold bullion is exchangeable for gold bullion, gold bullion is exchangeable for Canadian maple leaf coins are examples of like kind 1031 personal property exchanges.

The taxpayer who has 100 or more capital assets, selling and replacing use a Like Kind Exchange (LKE) Program to automate their exchanges. Heavy construction, mining, oil and gas equipment, cars and trucks in leasing programs use LKE programs to defer capital gain and recaptured depreciation taxes.

Multi Asset 1031 Exchange

Restaurants, fast food franchises, gas and convenience stores, apartments, motels are examples of mixed use exchanges. The exchange represents a combination of real and personal property that can be exchanged.

Mixed Use 1031 Exchange

When exchanging a farm or ranch or a duplex, there is real property held for investment or productive use in business and a farmhouse, used as a primary residence. Section 121 provides a $250,000 per husband and wife to defer capital gain. The remainer of the property is exchanged under section 1031 deferring the federal and state capital gain and recaptured depreciation.

Reverse 1031 Exchange

In a reverse 1031 exchange, the replacement property is purchased before the relinquished property is sold. A 1031 reverse exchange is the type of 1031 exchange used to accomplish the build to suit, improvement and leasehold exchange.

Simultaneous 1031 Exchange

A simultaneous 1031 is when the relinquished or old property is sold at the same closing as the replacement property. Many confuse the one closing simultaneous with the same day closings at two different title companies. Given there are two separate closings, this is really a forward exchange, delayed from one to the next.