Types of 1031 Exchanges
Not every 1031 exchange is structured the same way. The appropriate exchange format depends on the taxpayer’s unique circumstances, transaction objectives, and the characteristics of the properties involved.
Delayed Exchange
Sell First, Buy Later
The Delayed Exchange is the most common type of 1031 exchange. The taxpayer sells the relinquished property first, then identifies and acquires replacement property within the IRS-required timeframes. A Qualified Intermediary (QI) holds the exchange proceeds and coordinates the necessary documentation and assignment of rights throughout the transaction.
Reverse Exchange
Buy First, Sell Later
A Reverse Exchange allows the taxpayer to acquire the replacement property before selling the relinquished property. This structure requires additional planning and administration and utilizes an Exchange Accommodation Titleholder (EAT) in accordance with IRS guidelines. A Qualified Intermediary coordinates the exchange documentation and helps manage the required timelines.
Improvement Exchange
Use Exchange Funds for Property Improvements
Also referred to as a Build-to-Suit Exchange, an Improvement Exchange allows exchange proceeds to be used for qualifying improvements to the replacement property while it is temporarily held by an EAT. The Qualified Intermediary facilitates the required documentation and helps ensure the exchange complies with applicable IRS timing requirements.
Multi-Asset / Portfolio Exchange
Exchange Multiple Properties
A Multi-Asset or Portfolio Exchange involves the sale and/or acquisition of multiple properties as part of a single 1031 exchange. These transactions often require additional coordination and careful compliance with IRS identification and exchange deadlines. A Qualified Intermediary assists in preparing documentation and coordinating the sequence of each transfer.
Qualified Intermediaries do not provide tax, legal, or accounting advice. Taxpayers should consult with their own qualified advisors regarding their specific circumstances. All exchange structures must comply with applicable IRS regulations, and results depend on each taxpayer’s individual facts and transaction timeline.
Sell vs. Exchange
Property owners have several options when deciding whether to sell an investment property or complete a tax-deferred exchange under Section 1031 of the Internal Revenue Code. When IRS requirements are satisfied, a 1031 exchange may allow taxpayers to defer the recognition of capital gains, making it an important strategy to consider when evaluating long-term real estate investment objectives.
A tax-deferred exchange is one of several planning tools available to help investors reposition or consolidate real estate holdings, diversify into different markets or property types, or transition into investments with different management responsibilities. Whether a 1031 exchange is the right solution depends on each taxpayer’s individual objectives, investment strategy, and tax considerations.
Use our Capital Gains Calculator to estimate the amount of capital gain that may be deferred through a 1031 exchange based on the information you provide. The calculator is intended for informational purposes only. Actual tax consequences will vary and should be reviewed with your qualified tax advisor.