Different types of exchanges
There are three different types of 1031 exchanges to consider: Standard Exchanges, Reverse Exchanges, and Improvement Exchanges. Read more about each different type of exchange to see which is the best fit for you.
Standard exchanges
Sell first and buy second in a Standard 1031 Exchange. To fully defer your taxes, the IRS requires that you reinvest all of the cash equity from your sale (after paying off mortgages, closing costs, and commissions) into new investment property of equal or greater value (relative to the sales price of the property you sold.) A Standard Exchange must be set up before you close on the sale of your property. You’ll then have 45 days to identify the properties you’re planning to reinvest into, and 180 days in total to complete your reinvestment(s).
$100K Purchase
Paul bought this house for a price of $100,000
Sold for $300K
After setting up his exchanges, Paul sold for $300,000. A tax savings of 60,000 on his profit
Two $150K Purchases
Paul reinvested all of his profit into new, no-management investments that make him twice the monthly rent, without paying a cent in taxes!
Reverse exchanges
Buy first and sell second in a Reverse 1031 Exchange. The same reinvestment requirements and timelines apply as they would in a Standard 1031 Exchange (see above), except they begin with the purchase of your replacement property rather than your sale. This difference also alleviates you from having to identify property within 45 days of closing, since you’re buying your replacement property first! If you’ll be getting a loan to purchase your new property, the Reverse 1031 Exchange can complicate things a bit, so it’s important to understand your different options before getting started. We’ve listed them below for your review and evaluation. These explanations are simplified for educational purposes. There are potential pitfalls to be aware of, so please contact our Reverse 1031 Exchange Department (866) 944-1031 or schedule a consultation for a comprehensive recommendation before getting started.
All Cash
This method implies that the purchase is made completely with cash. Funds for the purchase can be from refinancing money or available cash on hand.
Parking Method
With this method, purchasers have the option to finance a replacement property with a traditional mortgage. When purchasers choose this method, the title of Relinquished property is deeded to the qualified intermediary, Accommodator before the close of escrow for the replacement property. Once the Relinquished property has sold, the exchange will be complete.
Financing
On occasion, lenders may finance a Reverse 1031 Exchange. Oftentimes lenders do not fully understand Reverse Exchanges, and if approved may result in higher interest rates.
Improvement exchanges
This type of 1031 exchange is a great tool because the value of the improvements can be directly counted toward your exchange. For example, if you sell a property for $100,000 and buy an $80,000 property in exchange, you can spend $20,000 on improvements and the exchange will be complete because of the total acquisition cost adding up to $100,000.
Sold for $100K
Paul bought this house for a price of $100,000
$80K Purchase
After setting up his exchanges, Paul sold for $300,000. A tax savings of 60,000 on his profit
$20K for Improvements
Paul reinvested all his profit into a new property that he improved using cash from his exchange. All the improvements got done with tax – free money!
Things to consider
Improvement 1031 exchange process is very complex and these are simplified explanations. There are potential pitfalls to be aware of. Please contact our Improvement Exchange Department (866) 944-1031 or schedule a consultation for a comprehensive recommendation.
Every dollar spent is tax free! If money is returned back at the end of the exchange, it would be taxable. So consider improving your property with your exchange funds instead!
Our fees for improvement exchanges is $5000*, so unless the improvements you are considering are more than $30,000, where taxes would be $10,000, paying the additional fee may not make sense. You can also improve property you currently own. Please call or schedule a consultation to ask about the details.
Learn more about our security
We require that for every secure exchange we open, we must include a mandatory Qualified Escrow Agreement. With this type of agreement, the bank must obtain your written approval before any of your money is moved.
After the account is funded, we cannot move your funds without your approval via signature. Our 1031 exchange process still includes insurance for Errors and Omissions and a Fidelity Bond for theft, but the system that is best for your security is using a Qualified Escrow Account. This account will require your signature for any transaction. This restricts our access to your account, and the bank can manage the interactions.
When you set up a Qualified Escrow Account, the bank will need your signature and authorization for any wire transfer made, and your funds will not be touched without your approval. Similarly to a bank, we use a two-factor authentication to assure your account and wire authorizations are secure.
