1031 Exchange Options for Second Homes
Let’s say you are considering a 1031 exchange - a simultaneous swap between two property owners - for your second home. This simple strategy is also known as a tax deferred exchange and comes in four basic types. It’s important, according to Real Living Sales Professionals, to understand each of them.
The 1031 exchange is also known as a “Starker” exchange, named for the first taxpayers to get the now popular, and more flexible, form of exchange approved by federal court. With a 1031 exchange, the swap is handled by an intermediary. The property relinquished and the property acquired may not have any relationship aside from the fact the person making a 1031 exchange is involved in both transactions.
Straight Swap
This type of exchange takes you back to the days before the 1031 exchange. Only two parties participate in a straight swap whch is a direct trade of one piece of real estate for another. The exchange happens simultaneously. Let’s say you and your neighbor decide you like each other’s home. In a straight swap you would exchange your property for his, and no cash would change hands.
Simultaneous Exchange
In this type of exchange, the title to the relinquished property is directly transferred to the buyer. The intermediary collects the cash for the sale from the buyer and pays cash to the seller of the replacement property. The seller directly transfers the replacement real estate title to the taxpayer. This method ensures the taxpayer doesn’t receive any cash during the transaction because that money would be taxable.
Delayed Exchange
In a delayed exchange, the relinquished and replacement real estate don’t close on the same date, but the replacement closing does occur within the 180 day time limit. This applies when the sale of the relinquished property must be completed before the taxpayer knows what property will be bought in the exchange.
Reverse Exchange
The reverse exchange is the most difficult and risky type of exchange. There are a number of procedures to follow, and if all the requirements aren’t met, the IRS may have something to say about your exchange. The standard rule for a 1031 exchange is the replacement property can’t be bought until the relinquished property has been sold. A reverse exchange switches the order of the two steps. Sometimes this can become unavoidable and when it is, you must do a reverse exchange.
