A delayed exchange is when the sale closing of the investment property (“relinquished property”) occurs first and the closing on the purchase of the new investment property (“replacement property”) is at a later date. Sometimes, this type of exchange is referred to as a “Starker Exchange”, after the well-known 9th District Court case in which the court ruled in the taxpayer’s favor for a delayed exchange prior to the current IRS rules and regulations. There are strict time frames and rules for identification of potential replacement property and a completion deadline for a delayed exchange. The IRS code dictates 45-days for identification of replacement property and 180-days to complete the exchange. The timeline starts from the closing date of the relinquished property.

In this type of exchange, the closing of the Relinquished property and the Replacement property take place on the same day. Regardless of whether the entire closing is held with one closing officer or separated as two transactions with two different closers, they must be contingent upon each other and cannot close on different days. Investors using a simultaneous exchange without the benefit of a Qualified Intermediary risk losing tax deferred status. Prior to the 1979 (Starker) decision mentioned above, most exchanges were limited to the “swap” or simultaneous format. However, since 1991, the only “safe harbor” for a simultaneous exchange is with the use of a Qualified Intermediary.

This type of exchange allows for the taxpayer to acquire a property prior to the sale of the relinquished property. Revenue Procedure 2000-37 published by the Internal Revenue Service on September 15, 2000, provided the first safe harbor for taxpayers wishing to utilize this exchange structure. In a Reverse Exchange, the replacement property closes before the client’s relinquished property closes.

There are two formats for completing a Reverse exchange. Because the taxpayer cannot own both properties at the same time, the Qualified Intermediary (“QI”) acting as an Exchange Accommodation Titleholder (“EAT”) must hold title to either the replacement property or the relinquished property while a buyer is found for the relinquished property.

Once a buyer can close on the relinquished property and prior to the 180-day completion deadline, the reverse exchange is completed with the Exchange Accommodation Titleholder transferring title to the taxpayer.

1. There are many reasons it may be advantageous or necessary to purchase and close on replacement property prior to selling. The investor may have located a replacement property and does not want to lose the opportunity.
2. Perhaps a seller is not willing to accept an offer contingent on the sale of the investor’s property.
3. Or a business owner may need time to make improvements to the new property to suit the business needs, so it is move in ready when the relinquished property closes.

There are many investment and practical reasons to contemplate using the Reverse exchange format. It is frequently used in combination with another form of exchange such as a Reverse/Improvement exchange. The Reverse exchange is more complex and requires prior consultation with the QI and coordination with the taxpayer’s tax and/or legal advisors.

An improvement or construction exchange is used when a taxpayer wants to acquire a property and arrange for improvements to be made on the land or structure prior to receiving it as replacement property. It is typically done as a delayed exchange but may also be combined with a reverse exchange. The improvements may be a building on an unimproved lot or improvements made to an existing structure. Many times, it is used to “balance an exchange”.