What is a Delayed 1031 Exchange?

Although a delayed 1031 exchange is really the most common type, there are plenty of restrictions that you will need professional help to work through.

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Today we’re talking with David Moore, co-founder of Equity Advantage, a firm that specializes in tax-deferred investments, in particular IRS Section 1031 exchanges.

David, what is a delayed 1031 exchange?

David Moore: A lot of confusion about what delayed exchanges are: most all exchanges are actually structured in a delayed exchange format. The way we look at exchanges, a traditional thought would be exchanges: you’ve got something, I’ve got something, we swap properties. That’s a simultaneous exchange. That’s something that rarely happens, because rarely do each of us have something that’s mutually beneficial for the other, and similar value in equity.

Delayed exchanges are the most common

In today’s world, most all exchanges other than reverses or improvements, are going to be delayed exchanges. I guess for lack of a better definition, a delayed exchange is a transaction or you’re going to relinquish the property first, and acquire a replacement second, versus a reverse exchange, where you’re buying first and selling second.

Any delayed exchange, the biggest issue we’ve got with the delayed exchange is that you’ve got 45 days from the date you relinquish the property, transfer that property, to identify what you’d like to acquire, and a total of 180 days to get the replacement. That’s why it’s a delayed exchange, you sell first, buy later, we step in the middle of the transaction, and turn it all into an exchange.

Are there other things investors should know about delayed 1031 exchanges?

David Moore: Well, the biggest headache with any exchange is time. The second biggest is vesting, that just means that the tax payer that relinquishes has to receive, and today’s world, it’s pretty complicated, because the tax legal world doesn’t see eye-to-eye with the finance world a lot of times. A simple example of why vesting gets to be problematic is depending on whether a … Let’s say you’ve got a tax payer and his or her spouse is in a community property state, versus a non-community property state.

You’ve got flexibility in a community property state to go in and out of a limited liability company that the spouses are considered a single member, but when we look at a non-community property state, now we’ve got a situation where they’re not, so we could do a deal for example in Oregon, and we get a call to put the transaction together, and we get the title report, the deal’s in the limited liability company, and they relinquish this property.

Get professionals involved sooner, rather than later

If they’re buying four units or less on the acquisition, most of those loans are sold to Freddie and Fannie, and they can’t finance that property in a limited liability company, so suddenly they need to take ownership, tenancy in common, or tenancy by entirety, and the problem there is, that we can’t have them make that change through the exchange. We would really need to know what’s happening, how people hold things, sooner rather than later, so we can address those issues, and have those conversations.

It comes back down … One of our questions a long time ago was, “When would I like to be involved with the transaction?” It’s really when you are contemplating a sale, it would be great to have a conversation at that point, we can see how things are helped, because that finance scenario is an example of how quickly investing can be problematic.

Thank you, David. Listeners may call 503-635-1031, or can visit 1031exchange.com for more information.

With a delayed 1031 exchange, like with other exchanges, there are a number of restrictions that you should seek professional help with. And, the moral of the story is: the sooner, the better. Give David and his team of experts a call today!