Types of Exchanges
Forward Exchange
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A Forward or "Delayed" Exchange is the most common type of exchange being that the relinquished property (sale) closes first then proceeds which are held by Pacific Financial Exchange (QI) are applied to the replacement property (purchase) to complete the exchange within the 180-day timeframe. The exchanger must engage the services of the QI before the sale property closes in order to have their exchange officially set up. The documents the QI will have the exchanger execute are an "Exchange Agreement" and "Assignment of Purchase/Sale Agreement".
Reverse Exchange
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A Reverse Exchange occurs when the purchase property transaction comes before the sale transaction. Since the IRS has rules that restrict an exchanger from owning both sale and purchase properties at the same time, the exchanger must lend the necessary funds to the Exchange Accommodation Titleholder (EAT) who will form a Special Purpose Entity (SPE) to go and purchase the property on the exchanger's behalf. The EAT will park and hold the property until the exchanger sells their relinquished property. Upon completion of the sale, the EAT (once paid back for the full cost of the purchase property) will then transfer the property to the exchanger to complete the Reverse Exchange within the 180-day timeframe. The exchanger and EAT must execute a Qualified Exchange Accommodation Agreement (QEAA) prior to the purchase transaction.
Build-To-Suit Exchange
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A Build-to-Suit Exchange, also known as a Construction Exchange, is a type of §1031 tax-deferred exchange that allows taxpayers to use exchange proceeds to improve or construct replacement property. This strategy is often used when the replacement property requires renovations, expansions, or new construction to meet the investor’s needs.
To qualify, the replacement property must be acquired and held by the EAT (with lended funds from the exchanger) while improvements are completed. Once the construction is done, the EAT then transfers the replacement property to the taxpayer within the 180-day exchange period. As long as the total value of the property and improvements is equal to or greater than the relinquished property, the taxpayer may defer all capital gains taxes and depreciation recapture under IRC §1031.