The 3 Most Common Types of Real Estate Exchanges

1031 exchanges come in several different types – all of which can be beneficial depending on your unique situation and ultimate goals. In this article, we are going to briefly explain three of the most common types of 1031 exchanges involving real estate.

Forward Exchanges

The forward exchange is the most common and “standard” type of 1031 exchange. This is typically what people picture when they think of 1031 exchanges. In a forward exchange, you sell a piece of relinquished property. Then, you identify replacement property in the 45 days thereafter. Finally, you close on your new replacement property and roll your net proceeds into that property on or before the 180th day following your relinquished property sale.

Reverse Exchanges

A reverse 1031 exchange accomplishes the same ultimate goal of a standard exchange (that of tax deferral) but with the order reversed. Instead of selling the relinquished property first, a reverse exchange starts with the acquisition of replacement property, and ends with the sale of the relinquished property. All time frames are the same. Reverse exchanges are useful in a hot seller’s market when you need to snatch up an ideal property before someone else does.

Build-to-Suit Exchanges

A build-to-suit exchange (also known as a construction improvement exchange) is a 1031 exchange in which the exchangor constructs improvements to their replacement property prior to the closing. This type of exchange is good for people who have found a replacement property that doesn’t quite fit their needs. With a construction exchange, you can make the necessary improvements to your replacement property and include those as a part of your exchange.

• Start Your Exchange: If you have questions about the different types of 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Wealth Building Tips

In this article, we will offer a few tips for building your wealth over time with a 1031 exchange.

Real Estate as a Wealth Building Vehicle

Real estate is a preferred vehicle for wealth building because you can defer your gains and continue to compound and build your wealth over time.

For example, let's say that we start off by purchasing a single-family rental. We're good stewards and managers of that property, and guess what? It goes up in value after a few years and we've acquired quite a bit of equity in that property.

Single Family to Multi-Family Property

Now, we're not complacent so we're not going to stay in that single family rental property. Instead we're going to defer the gains on its sale and acquire a fourplex or four unit multi-family property. We're going to take all of our proceeds from that single family rental, roll them tax-free into the new apartment building. Again, we're going to be good stewards and that property will continue to go up in value. After a few years of managing that property, it will have increased our equity position again.

Fourplex to 16-Unit Apartment Complex

Now, we're not complacent and we're going to continue to compound and build our wealth so we're going to dispose of the fourplex using a tax-deferred 1031 exchange and buy a 16 unit apartment complex. Again we're going to compound and build our wealth tax free over time. We're going to be good stewards and operators of that apartment complex and over time again we're going to build equity.

Parlay Your Investment Over Time

We're always going to be buying a bigger, better, more expensive property. Over the course of time we're going to parlay our initial investment from a single-family rental property into perhaps a hundred plus units. The reason that we’re able to do that is twofold:

1. We’re using a very tax-efficient strategy where we’re able to keep our wealth building and compounding for us

2. We’re using other people's money (OPM) to finance the bulk of our acquisitions. With only a little bit down (say 20%) we can take down a much more expensive property. The interest that we pay to the bank is tax deductible. Who really ends up paying the debt service anyway? It's our tenants. The tenants are paying the rent and we're using the rent to pay the debt service.

By building wealth through real estate we’re able to amass so much wealth tax-deferred so much more quickly than we could if we were burdened with laborious taxes.

• Start Your Exchange: If you have questions about building your wealth with 1031, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved