It is a well known fact that the IRS 1031 has some major benefits for investors; however, there are other lesser known facts that can also be used to an investor’s advantage. One of those is the reverse exchange, a fairly recent development that allows investors to purchase their replacement property before selling their original property. This is especially useful in a market where property sells quickly. Of course, since investors cannot hold the title to both properties at the same time, a Qualified Intermediary (also known as an Accommodator) has to hold one of them, making this a more expensive transaction than the traditional forward exchange.
If an investor buys a replacement property of lesser value that the one being sold, then this is called a partial exchange and the investor must pay the relevant tax on the difference in property values. This type of 1031 properties exchange provides flexibility for investors who only want to reinvest part of their capital gains into new, “like kind” property.
Other properties that may qualify under the IRS 1031 include properties owned in the United States, such as a TIC (tenant-in-common) investment property where a large group of investors each own a part of a commercial building. Water and mineral rights along with oil and gas investments may also qualify under the 1031 like kind property exchange.
There are also times when foreign exchanges are considered to be “like kind” properties, such as when the investor exchanges a foreign property for another foreign property. For instance, exchanging a French property for a Canadian property would be allowable, whereas exchanging a U.S. property for a Canadian property would not.
Another way to qualify for the IRS 1031 code is through improvement exchanges, also known as build-to-suit or construction exchanges. This enables investors to buy a replacement property of lesser value than the one they are selling. A Qualified Intermediary holds the title to the replacement property and the investor then has 180 days to improve the value of the property to achieve the value required for full tax deferral.
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