What is a Simultaneous 1031 Exchange?

A simultaneous exchange is a type of 1031 tax-deferred exchange in which both properties (the one you’re buying and the one you’re selling) close at the same time. As with any 1031 exchange, this allows the capital gains tax on those properties to be deferred.

Performing a simultaneous exchange can have significant benefits, but there are also some risks involved. Learn how this type of 1031 exchange works and what it’s used for in our guide.

How Simultaneous 1031 Exchanges Work

With simultaneous exchange, both your relinquished property and the replacement property close at the same time. However, this is not the norm. The most common form of 1031 exchange in real estate transactions is the delayed exchange, in which you close on your relinquished property before you close on the replacement property.

Simultaneous exchanges are rare, as the Internal Revenue Service allows you to replace your relinquished property with a like-kind replacement for up to 180 days after the sale of your relinquished property.

Requirements For a Valid Simultaneous 1031 Exchange

Even if you are swapping properties on the same day via a simultaneous 1031 exchange, you still need to meet certain requirements in order to qualify for tax deferral. For example, you should have the following:

A stated intent to exchange within a contract
Consistency within the various contracts between buyer, seller, and exchanger

Additionally, there must be language in an exchange agreement that prevents “actual or constructive receipt” of the sale’s proceeds. For the exchange to be valid, the exchanger cannot ever be legally in receipt of funds from the sale of the relinquished property.

Benefits of a Simultaneous 1031 Exchange

So why do investors use simultaneous 1031 exchanges instead of other types? There can be a variety of reasons, depending on your circumstances. Some of the most common benefits include:

Timing: If an exchangor can negotiate a long escrow on their replacement property, a simultaneous exchange allows the flexibility to then sell their relinquished property and coordinate the closings to occur at the same time.
Speed: A simultaneous exchange accelerates the transaction process, eliminating the need for complex coordination and reducing the risk of errors or delays.
Swap: Sometimes two parties will be exchanging properties with each other, or “swapping,” necessitating a simultaneous exchange. A swap does not technically require a Qualified Intermediary.
Withholding Tax Savings: Foreign persons may avoid withholding taxes on the sale of their relinquished property if they exchange it simultaneously for their replacement property with no taxable boot.

While experienced investors may be comfortable with a simultaneous exchange, it is always advisable to use the services of a professional Qualified Intermediary to ensure that the transaction adheres to all regulations and qualifies for the tax deferral.

Risks of a Simultaneous 1031 Exchange

There are some benefits to performing this type of like-property exchange, but there is a reason that simultaneous arrangements are so rare. Potential drawbacks and risks of a 1031 exchange include the following.

Timing issues: In order for the transaction to be valid, both properties must close at the same time, which can be tricky if multiple parties are involved.
IRS compliance: There are strict rules about how 1031 exchange contracts must be drawn up and the type of language they need to include. Without help from a Qualified Intermediary, important aspects of the transaction can be missed, invalidating the exchange.
Complexities between title companies: In many cases, the two properties involved in a 1031 exchange can be overseen by different title companies or attorneys. There must be coordination between these entities so that both real estate transactions close at the same time.

Typically, the only safety net for 1031 exchanges is the use of a Qualified Intermediary. Without their services, any failure within the transaction can result in significant financial penalties or an inability to avoid immediate capital gains tax on the exchange.

Simultaneous 1031 Exchange FAQs

Check out some of the most commonly asked questions regarding simultaneous exchanges below.

How long does simultaneous exchange and completion take?

By definition, a simultaneous 1031 exchange means that both properties must close on the same day. The difficulty of arranging this is one of the reasons that this style of exchange is rarely performed today.

What’s a disadvantage of a simultaneous 1031 exchange?

Simultaneous exchanges can be difficult to coordinate, the absence of a Qualified Intermediary can create more risk in the case of a swap, as it can be difficult to avoid one party having “actual or constructive” possession of sales funds from their relinquished properties. This may mean invalidating the exchange and losing the ability to avoid capital gains tax, which is the main advantage of performing a 1031 exchange in real estate.

What are the risks of same-day exchange and completion?

In general, a simultaneous exchange can have a high rate of failure. The exchange is not considered complete until both closings occur, and often either party may decide to back out at any time without legal repercussions. This is one reason why delayed 1031 exchanges have become the norm.

When do you have to report an exchange?

Any 1031 exchange must be reported for the same tax year in which the relinquished property was transferred. For simultaneous exchanges, this will be the same tax year as completion, since by definition both properties close at the same time.

Choose a Simultaneous 1031 Exchange Only in Specific Cases

Despite the risks, there may be some situations in which a simultaneous exchange is a good choice for all parties. If you’re considering a simultaneous exchange, make sure that both properties have been properly investigated and vetted, and that all parties are in agreement to perform the exchange. This form of 1031 exchange should only be performed by experienced real estate investors who understand the process.

In general, it’s best to use a delayed 1031 exchange with help from your tax advisor and a Qualified Intermediary like First American Exchange Company. We can help ensure that your transaction adheres to all exchange requirements and that you get the most out of your tax-deferred 1031 exchange.

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