Last updated on June 24th, 2021 at 03:09 pm
This is the oldest and most basic type of 1031 exchange. Very rare, it’s when you find a replacement property the same value as your own. While we still recommend using a qualified intermediary, a simultaneous exchange could happen without one. This article walks through the three types of simultaneous exchange.
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Swap or two-party trade
The most uncommon, this literally means you and another party sit down and trade deeds to your properties. On one hand, there’s no need for a qualified intermediary.
On the other, finding a property the exact value as your own is extremely unlikely. Additionally, you must have the same amount outstanding on the mortgage as the new property. If you don’t, you may end up with “boot“. Boot is taxable! If two investors are able to find an agreeable swap, most will use cash to compensate for the difference and avoid boot.
Another risk of a two-party exchange is that closing two properties on the same day is very difficult. There can be delays in the delivery of the properties or cash which could affect the integrity of the exchange. While it’s possible to do a two-party exchange on your own, we still recommend reaching out to a qualified intermediary for guidance.
Three Party Exchange
This is when an “accommodating party” is used to facilitate the transaction between you and the other party. There is no need for a qualified intermediary in these examples. There are three main types of three-party exchanges
Alderson or Reverse Missouri Waltz Exchange
In this type of three-party exchange, the buyer purchases a replacement property directly from the seller. Simultaneously, it is exchanged with the accommodator for the old property. There are some risks with this type of three-party simultaneous exchange
- A hazardous waste liability is attached to the buyer of the new property
- There could be liens, judgments, or other things filed against the buyer of the old property
Baird or Missouri Waltz Exchange
In this type, the accommodator and the seller of the new property exchange. Simultaneously, the seller of the new property sells their property to the buyer. There are some risks with this type of three-party exchange
- A hazardous waste liability is attached to the buyer of the new property
- There could be liens, judgments, or other things filed against the buyer of the old property
Pot Exchange
In this type, a number of people put their ownership interests into a hat and specify what type of replacement property they want. A single accommodator or escrow agent then sorts everything out and delivers the properties to each individual. This is done with a direct deed system, and occurs simultaneously.
Simultaneous Exchange with a Qualified Intermediary
This is the same as a two or three party exchange, but you use a qualified intermediary. In the IRS’ 1991 ruling on the 1031 exchange, the exchange is “safe-harbor” when QI’s are involved. In this type, you do the same activities. The difference is a qualified intermediary guides the process and makes sure the exchange follows IRS rules.
The downside is there’s a cost to use a qualified intermediary. While the entire point of a 1031 exchange is to avoid unnecessary costs, we still recommend a qualified intermediary. No matter what type of exchange, there are complexities and “gotchas” that could lead to a big surprise if you’re audited by the IRS.
