A reverse exchange involves the purchase of replacement property before you sell your relinquished property. Unlike a typical exchange, where you sell first and buy later, in a reverse exchange you acquire the replacement property first, and then sell the property you currently own. A reverse exchange is normally used when properties are selling quickly and inventory is scarce or the property you want to buy is uniquely suited to meet your particular needs.

A reverse exchange is a more complicated transaction because it involves "parking" the replacement property with the Qualified Intermediary. The reverse exchange is initiated with the Qualified Intermediary first purchasing your replacement property. When your relinquished property is then later sold, the Qualified Intermediary completes the exchange by deeding the replacement property to you.

Although reverse exchanges are authorized under Section 1031, they are more complex than ordinary like-kind exchanges and the tax advantages can be compromised if each step is not carefully planned and executed. Consequently, it is important that the Qualified Intermediary have in-depth knowledge of the precautions necessary to insure that all of the steps are completed in compliance with IRS regulations. Working with your tax advisors and attorneys, Asset Exchange of Oklahoma, L.L.C. draws upon substantial experience with reverse exchanges to help safely guide you through the process.

The Improvement Exchange

An Improvement Exchange is a "build-to-suit" or construction exchange that allows you to use exchange proceeds to acquire replacement property on which you (1) make additional improvements to those already existing, or (2) build new construction from the ground up. An Improvement Exchange is most often used when you want to replace existing business use or investment property with customized replacement property. This variation is widely used because it provides the opportunity to purchase properties needing renovation or to acquire raw land and build to an investor's exact specifications. Under Section 1031, an Improvement Exchange is more complex because the Qualified Intermediary is legally responsible for making the improvements to the replacement property during the 180-day exchange period. However, this is typically accomplished with the taxpayer's assistance and involvement. Once the project is completed or all of the exchange proceeds are depleted, whichever first occurs, the Qualified Intermediary then transfers the improved replacement property to the taxpayer.

To successfully complete an Improvement Exchange, advance planning is essential. Normal construction delays, inclement weather, obtaining government permits and other foreseeable interruptions can make it a challenge to complete the needed improvements within the 180-day exchange period. Asset Exchange of Oklahoma, L.L.C. is experienced in the successful completion of Improvement Exchanges.

The Personal Property Exchange

Internal Revenue Code Section 1031 allows you to exchange either "like-kind" real or personal property for other "like-kind" real or personal property. Although the rules for "like-kind" real estate are fairly broad, the rules to exchange personal property for "like-kind" or "like-class" are more restrictive.

Under Section 1031, a taxpayer can only receive tax deferral if the sale of personal property is exchanged for the purchase of personal property that falls within the same Product Class or General Asset Class. Product and General Asset Classes, as described in the Standard Industrial Classification (SIC) Manual, were developed for use in the classification of establishments and products by the type of activity for which they are engaged. Depreciable tangible personal property is exchanged for property of "like-kind" if it is exchanged for property of "like-class".

GENERAL ASSET CLASSES

1. Office furniture, fixtures, and equipment;
2. Information systems (computers);
3. Data handling equipment, except computers;
4. Airplanes and helicopters;
5. Automobiles and taxis;
6. Buses;
7. Light general-purpose trucks;
8. Heavy general-purpose trucks;
9. Railroad cars and locomotives;
10. Tractor units for use over-the-road;
11. Trailers and trailer-mounted containers;
12. Vessels, barges, tugs, and similar water transportation equipment;
13. Industrial steam and electric generation and distribution systems.

Unexchangeable Items

Another aspect of personal property exchanges that differs from real property exchanges is that certain items of the sale transaction, such as "goodwill," "covenants not to compete," and "inventory" do not qualify for tax deferral under IRC Section 1031. Consequently, when these items are sold the capital gain or loss may not be deferred and must be recognized by the taxpayer.

Mixed Exchanges

There are also many transactions that involve the sale of both real property and personal property. In these transactions the Exchanger is selling or buying both the real and personal property. Common examples involve the sale of hotels, restaurants, gas stations, farms or ranches. In these cases, you can allocate the proceeds specifically for real property and personal property and purchase "like-kind" property with the respective funds.

In a complex combined real and personal property exchange, it is important to maximize potential tax deferral benefits in advance. Asset Exchange of Oklahoma, L.L.C. will always work closely with your accountant or attorney to ensure that the transaction is structured properly.