Comparing Reverse and Delayed Exchanges
In many situations, an Exchanger’s circumstances dictate which type of 1031 exchange should be used. For example, if there is a desirable Buyer for an Old Property who says that the close of the sale must occur at a certain time, then a delayed exchange is indicated. Likewise, if an Exchanger finds a desirable New Property and needs to close its purchase soon in order to secure the deal, a reverse exchange is indicated. Other constraints involve the issue of financing. For example, if an Exchanger simply cannot acquire a New Property prior to the sale of the Old Property, with the resulting availability of the cash proceeds, then a delayed exchange is indicated. At times, the need to keep the Old Property in place until the New Property is fully available will dictate the choice of strategy. In these situations, the Exchangers options are limited and it is relatively easy to determine the optimal course of action.
Comparing Reverse and Delayed Exchanges
However, in many, many cases the Exchanger has a choice of which strategy – delayed or reverse - to use. Deciding which to use is usually requires little more than a basic analysis of a small number of criteria. As indicated below, there are many situations where a reverse is indicated. The frequency with which this is true is something of a “dirty little secret” in the QI industry as most QIs would much rather perform a delayed exchange. Unfortunately, the optimal strategy for the Exchanger often takes a back seat to the profit model of the QI.
Determining the optimal exchange strategy involves evaluating the primary criteria listed below. It is important to note that the tax deferral potential is not one of the criteria because the deferment potential is identical. The relative importance of the other criteria will be determined by the facts and circumstances of a particular situation. Each Exchangor should evaluate these at a level of detail that is appropriate to their objectives, particular risk sensitivities and economic situation.
Evaluation Criteria
- Optimizing Economic Benefit
An optimal exchange strategy delivers the best return on equity to the Exchanger. You should determine which strategy delivers the best return on your investment to you, not to the QI. For more, click here.
- Optimizing Asset Utilization
An optimal exchange strategy provides the most effective asset utilization to the Exchangor. Asset utilization means making assets available to for productive use and it means effectively positioning assets for involvement in an optimal exchange strategy. For more, click here.
- Reducing the Risk of a Failed Exchange
In a delayed exchange, there are strict rules and deadline regarding the identification and acquisition of New Property. In a reverse exchange, the rules are the same but the 45-day identification rule applies to property already owned. And, in a reverse exchange, extensions are possible - neither easy nor cheap, but possible – beyond the 180 deadline. For more, click here.
- Improving Asset Security
In a delayed exchange, you “park” cash with a QI – cash from the sale of an Old Property. In a reverse exchange, assets are parked – real estate, aircraft, vehicles, etc. Ownership of the cash in a delayed exchange has proven to be an ambiguous notion. Ultimate ownership of assets in a reverse exchange can be unambiguously established and maintained throughout the process. If asset security is an issue, and it should be for every exchanger, click here for more.