1. There must be an exchange of property. Something must be given away and something must be received. (this does not need to occur simultaneously)
2 The Exchanged properties must be like-kind to one another. If selling real estate, the Exchangor must purchase real estate. If selling personal property, the Exchangor must purchase personal property of the same class.
3. The exchange must satisfy the “Napkin Test.” This means, the Exchangor needs to go across or up in value and equity when finding a replacement property. If they reduce their value, they will owe taxes on the difference.
4. There must be continuity of vesting throughout the exchange. The same entity that gives up the relinquished property must receive the replacement property. (If John Smith sells property A, he must be the one that buys property B)
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A Delayed Exchange allows an investor to relinquish a property today while taking up to 180 days to receive the replacement property.
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A Reverse Exchange allows an investor to acquire a new property today and to sell the old property later. The Reverse Exchange greatly expands the ability of the investor to take advantage of changes in the marketplace and to improve his or her investment position. Although the Reverse Exchange has been used for decades, the Internal Revenue Service did not issue any guidelines until 2000 when they published Revenue Procedure 2000-37.
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An Improvement Exchange allows the investor to acquire precisely the property they wish. Improvements can be as simple as repairs to current structures or as complex as ground-up new construction. The Improvement Exchange opens up many opportunities to the savvy investor, even the possibility of improvements to property already owned.
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An Exchange combing both Delayed and Reverse Exchanges. It is possible to sell one property before the replacement is acquired and to relinquish another property afterward.
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