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Types of Exchanges
The tax code allows five different types of property exchanges. This
flexibility offers you, as a real estate buyer, the opportunity to
structure a deal in the way that best suits your situation.
The Delayed Exchange
This is the most common form of exchange. When you make a deferred
exchange, you first sell your existing (relinquished) property. Then,
you purchase your replacement property.
The Simultaneous Exchange
This is an exchange in which your relinquished property and your
replacement property are transferred on the same day.
The Reverse Exchange
This allows you to purchase replacement property before you sell your
relinquished property. The reverse exchange is a strategy for
investors who experience some difficulty finding a buyer for their
relinquished property or who find a property they are eager to buy
and must then decide which property in their current portfolio to
relinquish.
Personal Property Exchange
This offers you the opportunity to make an exchange of investment
property other than real estate. But, the like-kind property rule is
interpreted more narrowly for personal property than it is for real
estate. As a guide, the IRS provides an objective method of property
classification. Under this method, personal property will be
considered “like-kind” property if it is exchanged for property that
falls within either the same General Business Asset Class or the same
Product Class.
The Construction Exchange
This allows you to use a portion of the proceeds from the sale of
your relinquished property to improve or build on your replacement
property. This approach works well if your replacement property is
less valuable than the property you relinquish. When a construction
exchange is structured properly, you can use your improvement costs
to equalize the exchange.
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