Simultaneous Exchange refers to a type of transaction where the relinquished property and the replacement property are swapped simultaneously; that is, the transfer of ownership for both properties occurs at the exact same time.
Section 1031 of the Internal Revenue Code allows property owners to defer capital gains taxes on the exchange of business or investment property for “like-kind” property, under specific conditions and guidelines. A 1031 exchange can be a powerful tool for property owners, enabling them to reinvest funds that would have otherwise been paid as capital gains tax.
A few key points about Simultaneous Exchanges:
- Timing: The key element of a simultaneous exchange is that both the sale of the relinquished property and the purchase of the replacement property occur at the exact same time. This can be logistically challenging.
- No Delay: Unlike the more common deferred (or “Starker”) exchanges, there is no intermediary holding the funds between the sale of the first property and the purchase of the second property in a simultaneous exchange. Everything happens concurrently.
- Logistical Challenges: Simultaneous exchanges can be complex to coordinate because everything must be timed perfectly. Any delay or hiccup with either closing can result in the failure of the exchange to qualify under Section 1031, thereby triggering potential capital gains tax liability.
- Less Common Today: Due to the complexities and risks associated with coordinating simultaneous closings, deferred exchanges (where the investor has up to 180 days between the sale of the relinquished property and the purchase of the replacement property) have become more popular and common in the 1031 exchange industry.
When considering a 1031 exchange, it’s essential to work with professionals who are well-versed in the nuances of these types of 1031 transactions, including tax advisors and qualified intermediaries such as 1031 Exchange Place.