What is a Simultaneous 1031 Exchange?

Timing is a crucial element throughout the 1031 exchange process.

There are a few hard deadlines that real estate investors must meet when completing 1031 exchanges, and timing plays another important role in deciding which type of exchange you’re undertaking. There are four types of 1031 exchanges; in this article we’ll take a look at the pros and cons of simultaneous 1031 exchanges.

Four Types of 1031 Exchanges

Real estate investors who sell investment properties can defer capital gains and depreciation recapture taxes by rolling the entirety of their sale proceeds over into like-kind replacement properties in a 1031 exchange.

There are four types of exchanges:

1. Delayed exchange. This is the most common type of 1031 exchange. Purchase of the replacement property occurs after close of sale of the relinquished asset. Investors have 45 days to identify a replacement property and 180 days to close on it.
2. Reverse exchange. In a reverse exchange, the exchangor buys a replacement property prior to divesting the original asset involved in the exchange. Reverse exchanges are almost always all-cash deals.
3. Improvement or construction exchange. Investors can use the 180-day-to-close window to build out or improve their replacement properties. All funds must be held by a qualified intermediary (QI) during the improvement period.
4. Simultaneous exchange. Rounding out our list of types of 1031 exchanges is the rarely used simultaneous exchange. In this type of exchange, closings occur on the same day for both the relinquished and replacement properties.

Regardless of the type of exchange you undertake, you’ll have timelines to meet at several key points during the exchange process.

Types of Simultaneous 1031 Exchanges

Since closings for both properties occur on the same day in a simultaneous 1031 exchange, it’s often referred to as a “drop-and-swap” exchange.

The majority of 1031 exchanges are delayed exchanges – closing on the replacement property takes place within 180 days after the close of sale on the relinquished asset. Investors often require the nearly six-month window to close on a replacement property to successfully navigate the paperwork and complete their exchanges.

Even with the 180-day window in play, it still can be onerous for real estate investors to close on formally identified replacement properties within this timeframe. That’s what makes the simultaneous exchange so rare and difficult to pull off.

To complete a two-party simultaneous exchange, you’ll have to swap properties with another real estate investor who also wants to complete an exchange. Finding two investors with aligning investment objectives, property classes, types, and values, along with the ability to secure asset financing, is a rare occurrence.

Though the IRS recognizes three types of simultaneous 1031 exchanges, we will focus only on completing a simultaneous exchange using a qualified intermediary since the other methods typically carry greater execution risk.

Completing a Simultaneous Exchange Using a Qualified Intermediary

There are several compelling reasons to engage a qualified intermediary when attempting a simultaneous exchange.

In order to complete a simultaneous exchange, you’ll need to swap deeds on the same day – a difficult feat to manage with all the minute details associated with real estate transactions. One of the main roles of the QI during this type of exchange is to insulate investors from taking receipt of sale proceeds from their relinquished properties, which would void their exchanges. Additionally, the QI can quickly turn the exchange into a standard delayed exchange if there are any issues or administrative hurdles that hold up the closing process on either property. You’ll also have to perfectly align debt and equity, another thing that makes the simultaneous exchange difficult to pull off.

Putting it all Together

Investors have options when it comes to what type of 1031 exchange to pursue. While many investors prefer the flexibility offered by delayed exchanges, others pursue simultaneous exchanges where deeds for two properties swap hands on the same day. Consult with an experienced qualified intermediary, legal, or tax professional to determine which type of 1031 exchange might best suit your investment situation.