Forward Exchanges

Forward Exchanges

The most commonly utilized tax-planning strategy available to investors is the delayed exchange. A delayed exchange results when there is a delay between the sale of the relinquished property and the purchase of the replacement property.

The delayed exchange provides investors up to 180 days to purchase a replacement property after the relinquished property is sold. A Qualified Intermediary (“QI”) or other safe harbor is required to facilitate a valid delayed exchange. The delayed exchange occurs in three fundamental steps:

STEP ONE: Sale of the Relinquished Property: Before closing on the sale of the relinquished property, the exchanger retains a QI. The QI prepares an exchange agreement, assigns the sales contract, and sends the closing instructions to the escrow/closing agent. The QI instructs the escrow/closing agent to deed the relinquished property directly to the buyer and to deliver the sales proceeds directly to the QI – thereby preventing the exchanger from having actual or constructive receipt of the funds. Once the funds are delivered to the QI, access is restricted for the remainder of the exchange period. IRC §1031 provides strict rules for releasing funds to the exchanger.

STEP TWO: Identification of the Replacement Property: The exchanger must identify a replacement property within 45 calendar days after the close of the relinquished property. Three identification rules apply, which limit the number of properties the exchanger may identify:

• 3-Property Rule: Three properties, no matter what the fair market value; or
• 200-Percent Rule: Any number of properties, as long as the aggregate fair market value does not exceed 200% (2x) of the fair market value of all the relinquished properties; or
• 95-Percent Rule: Any number of properties without regard to value – provided 95% of the value of the identified properties is acquired.

STEP THREE: Purchase of Replacement Property: Within 180 calendar days after the sale of the relinquished property or the exchanger’s tax filing date, whichever is earlier, the exchanger must acquire a like-kind replacement property. The property acquired must be one or more of the previously identified replacement properties. The exchanger again assigns the purchase and sale contract to the QI, which purchases the replacement property with the exchange proceeds and causes the seller to deed the replacement property directly to the exchanger.

SIMULTANEOUS EXCHANGE

A simultaneous exchange occurs when the relinquished and replacement properties close simultaneously. However, a QI is still required, as it assures that the exchanger does not constructively receive the funds, thus ensuring the preservation of safe harbor treatment under the Treasury Regulations.