Ans: Under IRC code section 1031 (IRS) of the United States, an exchange in which the closing of both the relinquished and replacement properties take place simultaneously, i.e., on the same date and using the same title or office, is called as Simultaneous exchange. It is the oldest method to do an IRS 1031 tax deferred exchange and is covered by the Safe Harbor Regulations.
Q2: What are the different ways to perform a 1031 simultaneous exchange?
Ans: There are three ways to perform exchange under 1031 simultaneous exchange rules, which include Swap or Two-party exchange, Three-party exchange and Simultaneous exchange with the help of a Qualified Intermediary (QI).
Q3: What is the advantage of performing a two-party simultaneous exchange?
Ans: This exchange takes place between two parties where both exchange or swap the deeds with each other, without requiring a QI.
Q4: What is the disadvantage of performing a two-party simultaneous exchange?
Ans: It is difficult to look for another party who would like to swap for your property simultaneously, on such a short notice. Hence, most of the exchanges under this rule often become invalid.
Q5: What is the advantage of performing a three-party simultaneous exchange?
Ans: It does not require a QI, and allows the provision of an “accommodating party”, which facilitates the property transaction for the exchanger. The title is passed via the seller in the Baird format, while in the Alderson format it is done through the buyer.
Q6: What is the disadvantage of performing a three-party simultaneous exchange?
Ans: The three party 1031 simultaneous exchange accompanies certain disadvantages. The “accommodating party” takes the title to a property about which it has no information. Additionally, apart from recording the deeds as a proof for the occurrence of exchange, there is hardly any documentation for the same.
Q7: What is the advantage of opting for a simultaneous exchange with a Qualified Intermediary?
Ans: Under this type of Simultaneous 1031 exchange rule, the QI takes the responsibility of preparing all the documentation and paperwork, such as exchange agreement, other exchange related documents, etc. It also insulates the exchanger from any issues regarding “constructive receipt”. It is easy to convert this format into delayed exchange and hence avert the pressure of closing the property transaction simultaneously.
Q8: what is the disadvantage of opting for a simultaneous exchange with a Qualified Intermediary?
Ans: The trader is required to pay a certain amount to the Qualified Intermediary in lieu of his services. The cost is often may be fixed by mutual agreement between both the parties.
Q9: Under what conditions does the simultaneous exchange of properties become invalid?
Ans: Any delay in the swapping of deeds will make the transaction invalid. If you approach a third party to sell relinquished property and buy the replacement property, this also disqualifies your transaction as a simultaneous 1031 exchange. The occurrence of boot is also one of the reasons for the failure of simultaneous exchange.
Q10: What is a boot and how it makes 1031 Simultaneous exchange invalid?
Ans: If the trader accepts money obtained from the sale of relinquished property or puts it in an escrow account, the net amount you own supersedes the exchange property, which is taxable. This particular condition is termed as boot, under which the simultaneous exchange fails to succeed.
Q11: Who is a qualified intermediary?
Ans: It is usually one of the simultaneous 1031 exchange firms that taxpayers opt to perform the exchange on their behalf. A QI is also known with the names of facilitator, intermediary, qualified escrow holder, or accommodator. It takes full responsibility of the exchange agreement and other paper work required to complete the exchange.
Q12: What are the other tasks that a QI performs?
Ans: A QI or one of 1031 exchange companies sells the relinquished property on behalf of taxpayer. It also accepts the proceeds obtained from the sale and uses the same to buy replacement property. In a 1031 simultaneous exchange, this entire process must be completed within a single day and hence the role of the QI becomes even more important.
Q13: How can you save transaction under simultaneous exchange of properties if the sale or purchase is delayed?
Ans: There may be occurrences where due to certain obstacles, the closing of relinquished or replacement property fails to complete, resulting in the simultaneous exchange to go invalid. However, protective exchange documents could be very helpful in saving your deal in any such situation.
Q14: When should the protective exchange documents be prepared?
Ans: It is better to prepare and get the protective documents signed before the deal of the sale of relinquished property is closed. Taxpayers often prefer retaining a QI at reduced fees to prepare protective exchange documents in case something goes wrong.
At Triple Net Investment Group we can assist you in locating a like-kind property for a 1031 exchange and ensure a smooth and successful transaction.
