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A real estate exchange can be one of the best ways to move property. In most situations, you can exchange business and investment properties for like property, and avoid having to pay costly taxes right away. There are also other types of exchanges that you could take advantage of. Working closely with your tax professional, your real estate agent, and your real estate attorney will help you find the best scenario for your unique situation. Following are a number of different types of real estate exchanges you could take advantage of. 1031 or "Like-Kind" Exchanges — In "like-kind" exchanges, no gain or loss is recognized by the IRS under Section 1031. Properties that are of like kind, meaning that they are of the same nature or character, are exchangeable. This also allows for properties that are of different grades or of different quality to be exchanged. Unimproved or improved real properties are in most cases also considered "like-kind." Simultaneous Exchanges — Real estate exchanges that fall under this category involve the simultaneous sale of the original property and purchase of the replacement property. This allows you to forego the need of a "qualified intermediary" to take control of the proceeds from the sale before new property is purchased. This can also be very risky, however, and may forfeit your tax deferral if not transacted correctly. Reverse Exchanges — In this type of exchange, the process happens in reverse, so to speak. The acquisition of the replacement property happens before the original property is sold. Delayed Exchanges — Delayed exchanges again deal with the period of time involved in real estate exchanges. It is defined as a transaction whereby the sale of the property happens prior to the acquisition. In order for the property transaction to be considered a "like-kind" exchange, it must be done within 45 days of the close of the relinquished property. The new property must be identified and the close of escrow must happen within 180 days of each other. Improvement Exchange — An improvement exchange, sometimes also called a construction exchange, is designed in such a way that proceeds from the relinquished property are able to be used to purchase replacement property that needs to be improved. When this happens, an intermediary will retain all ownership of the replacement property until construction is finished or excess proceeds are used up fully. At the end of this construction or improvement period, the intermediary transfers the ownership of the replacement property to the exchanger.
Talking with and working with your real estate attorney and tax professional to handle these real estate exchanges is necessary. Do not overlook the importance of the service they provide to you in securing your investment.
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