4 Different Types of 1031 Exchanges

A 1031 exchange lets you defer capital gains taxes when you sell certain property and put the money into a similar one. In short, it’s how investors trade up to a bigger or better-located property without handing the IRS a tax bill on the way.

A lot of people think there’s only one way to do it. There are actually four, and the right one depends on your goals and your timing. Here’s how they break down.

1. Simultaneous exchange. Also called a same-day exchange, this is the most straightforward of the bunch. You sell your old property and buy the new one on the same day, with the two closings timed so the sale proceeds pay for the purchase. Using the same title company for both keeps it simple.
2. Deferred exchange. A deferred (or delayed) exchange is the one most investors use. You sell the relinquished property first, then you have 45 days to identify your replacement and up to 180 days to close on it.
3. Reverse exchange. In a reverse exchange, you flip the order and buy the replacement property first. After that, you have up to 180 days to sell your old property and get reimbursed. It’s a great option when you find a deal you can’t pass up but haven’t sold your current property yet.
4. Improvement exchange. Also called a construction or build-to-suit exchange, this one lets you use exchange funds to improve the replacement property. Your qualified intermediary takes title and holds it while the work gets done. The same 45-day and 180-day deadlines apply, and only the improvements completed in that window count toward your exchange.

No matter which type you choose, one rule holds true. To defer all of your taxes, you need to reinvest every dollar of the proceeds into one or more replacement properties. Those properties have to be like-kind, and you have to hold them for business or investment.

Still Have Questions?

1031 exchanges come with a lot of moving parts and plenty of rules. If you’ve got questions or want to talk through your options, call us at 888-508-1901 and we’ll set up a consultation.

Chris Peterson — Texas Licensed Attorney & Founder, WealthBuilder 1031

Chris is the Owner and President of WealthBuilder 1031 and a licensed Texas attorney. He graduated from Wheaton College and the University of Texas School of Law and speaks regularly to realtors, accountants, and title companies about 1031 exchanges. Learn more →