Blended 1031 Exchange

Exchange Type

Blended 1031 Exchange

1031 exchanges may be done as either delayed, reverse, or improvement exchanges, each with their own benefits and disadvantages. At DeferTax, we take our clientele’s needs into account before we start advising them on the type of 1031 exchange that may work the best for them. As you may already know, a 1031 deal is an IRS-approved transfer of business or property without immediate tax liability to the exchangor.

Our clients typically use the 1031 to transfer property ownership, but the exchange has quite a broad usage. Certain depreciable and non-depreciable assets also qualify for trade under the 1031. The only stipulation is that the deal must reach completion within a 180-day window from the initial transfer and that the properties or assets transferred should be of a “like-kind.”

There are several different types of 1031 exchanges that DeferTax deals with. Our clients tend to have a wide range of properties and business assets. Occasionally, they have property or assets to transfer that the standard types of 1031 exchanges don’t work with. For those specific clients who are eager to gain some benefit from the 1031, we provide a specialized flexible type of exchange known as the blended 1031 exchange.

Exploring The Blended 1031 Exchange

Blended 1031 exchanges might be compared to bespoke exchange procedures. They may combine one or more standard exchange types such as delayed, improvement, or reverse exchanges. With so many options for the 1031, why would a client even consider a blended exchange?

The blended exchange is performed when one of our clients is looking for benefits from a 1031 that one of the standard exchange methods can’t give them. However, when trying to finalize a blended exchange, you need a qualified intermediary that you can trust. For each of our clients, DeferTax is that trusted intermediary.

How Do The Different Types of Exchange Work to Generate Value?

The 1031 is one of the smartest ways to avoid taxation on the transfer of property or assets. The taxes that affect property sales include capital gains tax, state taxes, depreciation, and other liabilities depending on the seller’s tax bracket. By using the 1031 exchange, an exchanger can keep every dollar of the property’s equity for reinvestment. It’s strictly better than a typical property acquisition because the government doesn’t impact the funds that the initial sale generated.

As a result, the exchanger can acquire a property of equal value that may offer opportunities for better cash-flow or location than the previous assets. The client usually defines his or her goals when they set out to make the purchase, and we use those goals to determine whether the exchange will generate value for the exchanger or not.

What Doesn't Qualify for 1031 Transfers?

The IRC 1031 was amended in 1986 to remove some property interests from being exchanged, including private residential buildings and stock in trade. Property that the owner holds primary for sale is also not covered under the 1031. If you live in a mixed-use building, you may transfer the property under a 1031 exchange, but it may require blending other types of 1031 exchanges to make it worth your while.

The typical types of 1031 transfers are as follows:

The Delayed 1031

A delayed 1031 exchange deals with selling your property first and then acquiring a “like-kind” property to replace it. You are responsible for reaching out to a buyer and negotiating the transfer. Once you have done that, your sale and purchase agreement needs to stipulate that the transfer is subject to a 1031 exchange. DeferTax takes it from there, drawing up the required documentation to sign and forward it to the relevant personnel. When the sale is closed, you’ll be presented with an ID packet that you will need to fill out and sign. You then have forty-five (45) days to complete the second phase of the exchange.

In the second phase, you will need to locate a property of “like-kind” and negotiate the sale. The seller and closing agent both need to be aware of the 1031 exchange stipulations. Once you’ve drawn up the sale and purchase agreement with the required clauses for the 1031 to be successful, DeferTax handles drawing up documents to facilitate the 1031 exchange. When the seller and the exchanger sign off on the papers, DeferTax performs the transfer of funds, and the title is direct deeded to the exchanger. In the delayed transfer, the relinquished property is sold before you acquire the replacement.

The Reverse 1031

Similar to the delayed 1031 exchange, the reverse 1031 exchange happens in the opposite manner. First, the exchanger locates a property, negotiates the price and draws up the sale and purchase agreement, taking into account the 1031 exchange clause. The exchanger should inform the closing agent of the exchange before contacting DeferTax to make arrangements.

Before the acquisition happens, you must first have funding in place to complete the purchase. This funding may come from personal finance, loans, or from the proceeds of the exchange itself. Once you’ve acquired the funding, DeferTax will draw up the documents and close the sale, transferring the title to the replacement property.

Once the closing has happened, you have a 45-day window to determine a property to relinquish. When you’ve decided which property will be sold, you should contact the closing agent and let them know about your choice. It would be best if you informed DeferTax of the final transfer so that we can draft the documents for the exchange. The next steps depend on which one of the properties was parked. The entire process must be completed within the 180-day window.

The Improvement 1031

The improvement 1031 can be done either as a delayed 1031 or as a reverse 1031 exchange. The significant difference is that the improvement 1031 requires that all improvements the exchanger intends to do also need to be completed within the 180-day window. In both the delayed and reverse improvement exchanges, a Limited Liability Company known as the EAT holds the property title until the end of the 180 days. At the end of this period, the EAT may transfer ownership to the exchanger, or DeferTax can alternatively set the exchanger as the LLC’s sole owner.

Need advice on 1031 Exchanges, and which one is right for you?

Let DeferTax walk you through the process step by step. Give us a call today to find out more.

Start An Exchange
Complimentary Consultation
Test Your Knowledge