Prior to 1984, when Congress modified the Internal Revenue Code on exchanges and formally approved the Starker concept of delayed exchanging, virtually all exchanges were of the simultaneous type. To qualify as a simultaneous exchange, both the relinquished property and the replacement property must close and record on the same day.

Some real estate agents - and some investors - still try to accomplish simultaneous exchanges, primarily to avoid the payment of fees to an intermediary. There is significant danger and legal exposure in this attempt since many unforeseen events can cause the closing and recordation to be delayed on one of the properties, leaving the investor with a failed exchange and the obligation of taxes that would otherwise be deferred. For example, if the properties are located in different counties, it is highly unlikely that the recording will take place on the same day. If two different title companies are involved, it is virtually impossible for both to have the funds to close in their possession on the same day. For instance, several states have "Good Funds" laws in effect: a title company, escrow holder or closing attorney cannot disburse funds not actually in their possession. Additionally, in directing a title company to disburse funds for the purchase of the replacement property, it could be contended successfully by the IRS that the investor had what is considered "constructive receipt" of the proceeds of the sale, and therefore taxes on the gain would be due. However, the 1031 regulations contain what is referred to as a "Safe Harbor" provision, which does provide that in the event an intermediary is used in a simultaneous exchange, and the transaction proves not to be simultaneous, the exchange will not fail simply for that reason.

Delayed

Generally, when one discusses exchanges, the type of exchange referred to is the delayed, or Starker exchange. This term comes from the name of the exchangor who was first challenged for a delayed exchange by the IRS. From this tax court conflict came the code change in 1984 that formally recognized the delayed exchange for the first time. This is now the most common type of exchange, and there are several types of delayed exchanges which we will be discussing.

In a delayed exchange, the relinquished property is sold at Time 1, and after a delay, usually up to 180 days, the replacement property is acquired at Time 2. There are some time constraints and rules which must be followed which will be discussed in a moment. In the meantime let's look at another form of exchanging.

Improvement and Construction exchanges

In some cases, the replacement property requires new construction or significant improvements to be accomplished to make it viable for the specific purpose the exchangor has in mind for the property. Such construction or improvements can be accomplished as part of the exchange process, with payments to contractors and other suppliers being made by the Intermediary out of funds held in a trust account. Therefore, if the replacement property is of lesser value than the relinquished property at the time of the original transaction, the improvement or construction costs can bring the value of the replacement property up to an exchange level which would allow the transaction to remain tax free. Later we address exactly how to determine what price must be paid for the replacement property and how we design the entire exchange transaction.

Reverse Exchanges

The reverse exchange is one in which the investor finds a replacement property and wants to acquire it before he sells his relinquished property. Since the exchangor cannot buy the property and later exchange into property that he already owns, he must find a way to acquire the replacement property and still maintain the integrity of his exchange. This is accomplished by securing a surrogate buyer for the property.

Tax deferred exchanges, as defined in Section 1031 of the Internal Revenue Code, establish the parameters for the sale and purchase of qualifying investment property for the purpose of deferring taxes on any capital gain. The idea behind the exchange is to simply transfer equity from one property to another and thereby avoid a taxable event, as would be found in a traditional sale and repurchase.

Although reverse exchanges were specifically excepted from the 1991 Treasury Regulations (remember those are the guidelines for all tax deferred exchanges), they have recently been approved, as of the date of distribution of a new Revenue Procedure issued September 15, 2000.

Due to the fact that reverse exchanges are more complicated than typical simultaneous or delayed transactions, they require extensive and comprehensive planning. This is necessary to properly structure the property transfers, balance the equities and streamline the entire transaction.

Business and Personal Property exchanges

Internal Revenue Code Section 1031 does allow the exchange of many types of property other than Real Estate. Investors may exchange for example, rail cars, trucks, ships, classic cars or live stock, among other assets. Therefore, business exchanges are a common transaction. While the basic exchange rules are the same, certain complications arise in classifying the non-real estate assets into one of several categories so that they meet the like-kind requirements of the regulations.

Since exchanging requires the replacement of relinquished property with a "like kind" asset, business and personal property exchanges necessitate the qualification of properties to be exchanged, to be categorized into either Asset Classes or Product Classes.

The Asset Classes are limited to those identified in the Treasury Regulations, based upon the April 20, 1990 publication in the Federal Register (55FR1763S). A summary of the limited Asset Classes follow:

Asset Classes
00.11	Office furniture, fixtures, & equipment	00.242	Heavy general purpose trucks
00.12	Information systems (computers, peripheral equipment)	00.25	Railroad cars & locomotives (except those owned by rail cos.)
00.21	Airplanes (except commercial), helicopters	00.26	Tractor units for use over the road
00.22	Automobiles, taxis	00.27	Trailers, & trailer mounted containers
00.23	Buses	00.28	Vessels, barges, tugs, & similar equip. (exc. marine const.)
00.241	Light general purpose trucks		Industrial steam and electric generation

Product Classes and Codes (Four Digit SIC Product Codes) are limited to those found in the Standard Industrial Classification (SIC) codes, set forth by the United States Government for the purposes of administration by the Internal Revenue Service. These codes are designed to classify enterprises by the type of activity in which they are engaged.

The Standard Industrial Classification (SIC) codes fall within the following headings:

SIC Codes
Agricultural, Forestry and Fishing	Wholesale Trade
Mining	Retail Trade
Construction	Finance, Insurance, and Real Estate
Manufacturing	Services
Transportation and Public Utilities

While business or personal property exchanges are a simple enough process for the experienced intermediary, it can be thoroughly confusing for the uninitiated exchangor. Making the selection of a qualified intermediary is extremely important to the successful structuring of the personal property exchange.

When considering an exchange of personal property or business assets, it is important to remember that some business assets are not exchangeable. For example, neither the goodwill or going concern value of a business is exchangeable, and therefore, will be taxable.

Non-depreciable assets, collectibles or inventory are not exchangeable. Care should be given to structure your transaction with the assistance of a qualified tax professional. In some cases, they can show you methods by which the values of certain non-exchangeable assets can be adjusted.