Basic types of 1031 exchanges

A Simultaneous Exchange is an exchange in which the closing of the relinquished property and the replacement property occur on the same day. Ideally, these closings are scheduled back-to-back so there is essentially no time interval between sale and purchase. This type of exchange is covered under the safe harbor regulations established by the IRS in 1991.

A Delayed Exchange is an exchange where the replacement property is closed at a date after the closing of the relinquished property. The exchange is not simultaneous or on the same day. This type of exchange is sometimes referred to as a "Starker Exchange" after the well known Supreme Court case that is the grandfather of a delayed exchange. In 1991, section 1031 of the Internal Revenue Code provided guidelines and strict time frames for completion of a delayed exchange.

A Reverse Exchange (Title-Holding Exchange) is an exchange in which the replacement property is purchased before the relinquished property is sold. Usually the Intermediary takes title to the replacement property and holds title until the taxpayer can find a buyer for his relinquished property. Subsequent to the closing of the relinquished property (or simultaneous with this closing), the Intermediary conveys title to the replacement property to the taxpayer.

An Improvement Exchange (Title-Holding Exchange) is an exchange in which a taxpayer desires to acquire a property and arrange for construction of improvements on the property before it is received as replacement property. The improvements are usually a building on an unimproved lot but could also include enhancements made to an already improved property. This type of exchange is completed in order to create adequate value to close on the exchange so that a trade down in value does not occur. The Code and Regulations do not permit a taxpayer to construct improvements on a property as part of a 1031 Exchange after he has taken title to property as exchange replacement property. Therefore, it is necessary for the Qualified Intermediary to close on, take title, and hold title to the property until the improvements are constructed. Once sufficient value has been added, the QI conveys title to the taxpayer as replacement property. Improvement Exchanges may be done in combination with either a delayed exchange and reverse exchange, depending on the circumstances. In 2000, the IRS issued safe harbor guidance on Reverse Exchanges (including title-holding exchanges for construction or improvement).