1031 Exchanges: Top 5 Little-Known Uses

1. Reverse exchanges Reverse exchanges are a relatively recent development, allowing investors to purchase a replacement property and then sell their existing property within 180 days. Because the …

1. Reverse exchanges

Reverse exchanges are a relatively recent development, allowing investors to purchase a replacement property and then sell their existing property within 180 days. Because the investor may not hold title to both properties simultaneously, a qualified intermediary holds title to one of them. This makes reverse exchanges more expensive than standard exchanges; costs range from $1,000 to $5,000 with most companies.

This strategy can be advantageous in markets where properties are selling quickly and the potential replacement properties identified in the standard forward exchange process may be snapped up by other buyers. It also provides flexibility for investors who encounter excellent opportunities requiring immediate action that do not allow for the time to sell their existing property first.

2. Improvement exchanges

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Improvement exchanges, also called build-to-suit exchanges or construction exchanges, enable investors to buy replacement property of lesser value than the one they are selling. A qualified intermediary takes title to the replacement property, and the investor has 180 days to improve the value of the replacement property to achieve the value required for full tax deferral. Costs are similar to reverse exchanges—in the range of $1,000 to $5,000.

3. Partial exchanges

In a partial exchange, the investor buys replacement property of lesser value than the one being sold. The investor then pays the relevant taxes on the difference in value. This provides flexibility for investors who only want to reinvest part of their capital gains into new like kind property.

4. Unusual options

Investors with U.S. real estate investment property may be able do 1031 exchanges into some surprising investments that will still qualify as like kind properties. Tenant in common (TIC) investments, where a group of investors share fractional ownership of a large commercial building, are one potentially allowable option. Oil and gas investments, as well as mineral and water rights, are other avenues that may be allowed through a 1031 exchange. These investments can have lucrative returns.

5. Foreign property

Exchanges between U.S. real estate and foreign real estate are not considered like kind property and therefore are not allowed. However, investors can exchange foreign property for other foreign property. For example, an investor could exchange a Canadian property for a Mexican property, or a French property for an Irish property, but an exchange between a U.S. property and a Canadian property would not be permitted.

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