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What is a Delayed Exchange?

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  • Written By: Mary McMahon
  • Edited By: C. Wilborn
  • Last Modified Date: 12 July 2019
  • Copyright Protected:
    2003-2019
    Conjecture Corporation
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A delayed exchange is a transaction in which someone swaps a piece of property with another piece of property "of like kind," with a brief lag between the sale of one property and the acquisition of another. Exchange transactions of this nature allow the person doing the exchange to avoid capital gains tax on the property which they sell. Not all nations allow people to do delayed exchanges, and the regulations involved may vary. It is advisable to consult an accounting specialist before doing a delayed exchange to confirm that it is conducted properly and legally.

Capital gains taxes on real estate sales can be significant, especially for people who bought low and sold high. A property exchange can eliminate capital gains tax when it is handled appropriately. Property exchanges can be used on commercial and residential real estate, and there are a number of types, including simultaneous exchanges and reverse exchanges. Such transactions are overseen by real estate agents who are familiar with the process of buying and selling property and handling property exchanges.

In the United States, the section of the Internal Revenue Service Code which addresses property exchanges and capital gains tax liability is section 1031. Consequently people may refer to property exchanges as 1031 exchanges. The delayed exchange or nonsimultaneous exchange is one of the most common forms of 1031 exchange.

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A delayed exchange starts with selling the property which someone wants to relinquish. The proceeds of the sale are placed in a binding trust, which is managed by an intermediary. After the sale closes, the clock starts ticking on a 45 day window of time to identify a comparable piece of property for exchange. The contents of the trust are applied to the purchase of the new property by the intermediary within 180 days of the original sale, effecting an exchange of the two properties.

Choosing to go with a delayed exchange has a number of advantages. It provides some breathing room to look for a replacement property of like kind, which can be very useful. For people who are using a property exchange to buy a new home so that they can relocate, this time window allows time to get to know the new community before making an offer on a new home. The risk of a delayed exchange is that it may not be possible to identify a replacement property within the allotted time, in which case liability for capital gains tax will kick in.

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