Different Types of 1031 Exchanges

Refer to this list to determine which type of 1031 Exchange aligns best with your real estate investment portfolio and strategy.

Start an Exchange

There are three distinct types of 1031 exchanges to consider: Standard Exchanges, Reverse Exchanges, and Improvement Exchanges. Explore each type further to determine which aligns best with your needs.

Standard Exchanges

In a Standard 1031 Exchange, the process involves selling first and buying second. To entirely defer your taxes, the IRS mandates that you reinvest all the cash equity from your sale (after settling mortgages, closing costs, and commissions) into new investment property of equal or greater value concerning the sales price of the property you sold. It's crucial to set up a Standard Exchange before closing the sale of your property. Subsequently, you have 45 days to identify the properties for reinvestment and a total of 180 days to complete your reinvestment(s).

$100K Purchase

Paul purchased this house for $100,000.

Sold for $300K

After initiating his exchanges, Paul sold the property for $300,000, resulting in a tax savings of $60,000 on his profit.

Two $150K Purchases

Paul reinvested his entire profit into new, no-management investments that generate twice the monthly rent, all without incurring any taxes!

Reverse Exchanges

In a Reverse 1031 Exchange, the process involves buying first and selling second. The reinvestment requirements and timelines are the same as in a Standard 1031 Exchange, but they commence with the purchase of your replacement property rather than the sale. This eliminates the need to identify the property within 45 days of closing, as you are acquiring your replacement property first. However, if you plan to obtain a loan to purchase the new property, the Reverse 1031 Exchange can complicate matters. It's crucial to understand your options before proceeding. The explanations provided here are simplified for educational purposes, and it's advisable to contact the Reverse 1031 Exchange Department at (323) 827-8738 or schedule a consultation for a comprehensive recommendation before initiating the process.

All Cash

This method suggests that the purchase is entirely made with cash. The funds for the purchase can come from refinancing money or available cash on hand.

Parking Method

In this approach, purchasers have the flexibility to finance a replacement property with a traditional mortgage. When opting for this method, the title of the Relinquished property is transferred to the qualified intermediary (Accommodator) before the close of escrow for the replacement property. Once the Relinquished property is sold, the exchange is considered complete.

Financing

Occasionally, lenders may provide financing for a Reverse 1031 Exchange. However, lenders may not always fully comprehend Reverse Exchanges, and if approved, it might lead to higher interest rates.

Improvement Exchanges

This type of 1031 exchange is a valuable tool because the value of the improvements can be directly counted toward your exchange. For instance, if you sell a property for $100,000 and exchange it for an $80,000 property, you can allocate $20,000 for improvements, and the exchange will be considered complete, as the total acquisition cost adds up to $100,000.

Sold for $100K

Paul purchased this house for $100,000.

$80K Purchase

After initiating his exchanges, Paul sold the property for $300,000, resulting in a tax savings of $60,000 on his profit.

$20K for Improvements

Paul reinvested all his profit into a new property and used cash from his exchange to make improvements. All the improvements were done with tax-free money!

Things to consider

The Improvement 1031 exchange process involves complexity, and the provided explanations are simplified. Be cautious of potential pitfalls, and for a comprehensive recommendation, please reach out to our Improvement Exchange Department at (323) 827-8738 or schedule a consultation.

Each dollar spent during this process is tax-free. However, if any funds are returned at the end of the exchange, they become taxable. Therefore, it is advisable to consider using your exchange funds for property improvements.

Our fees for improvement exchanges are $5000*. Unless the planned improvements exceed $30,000, resulting in potential taxes of $10,000, paying the additional fee may not be cost-effective. Additionally, you have the option to enhance a property you currently own. Feel free to call or schedule a consultation to inquire about the details.

Learn more about our security

For every secure exchange we initiate, it is mandatory to include a Qualified Escrow Agreement. With this agreement, the bank is obligated to obtain your written approval before any of your funds are moved.

Once the account is funded, we cannot execute any fund transfers without your approval through a signature. While our 1031 exchange process includes insurance for Errors and Omissions and a Fidelity Bond for theft, the most secure system for you is employing a Qualified Escrow Account. This account necessitates your signature for any transaction, limiting our access to your account, with the bank managing the interactions.

When establishing a Qualified Escrow Account, the bank will require your signature and authorization for any wire transfer, ensuring your funds remain untouched without your explicit approval. Similar to a bank, we implement a two-factor authentication to guarantee the security of your account and wire authorizations.