1031 Tax Deferred Exchange

There are actually five types of 1031 tax deferred exchanges. Under the IRS tax code, section 1031, you can sell real or personal property then reinvest the earnings into new property of like kind, without paying capital gains taxes. There is a 180-day limit to completing the transaction, and certain rules apply.

Forward or Reverse 1031 Tax Deferred Exchange

In a reverse 1031 tax deferred exchange, you would purchase the replacement property before you sell the original property. Because you must go through a qualified intermediary, this is allowed. He or she actually acquires the property for you then transfers the title to you when you sell the original property.

Another type of 1031 tax deferred exchange is called a simultaneous exchange. This is where you close both properties on the same day. Timing is everything in real estate, and this is a rare type of exchange. It's not often that investors close on both properties at the same time.

Finally, there is a 1031 exchange called a construction or improvement exchange. The intermediary will possess the physical replacement property and improve it. When construction is complete, the intermediary will exchange the property with you.