Property Exchange Company
serves as a qualified intermediary in deferred, simultaneous, reverse, construction, and personal property exchanges.
It is unusual to both sell and buy property simultaneously. Thus, deferred exchanges are by far the most common type of exchange. Here's how the structure works: You have an agreement to sell your property. You enter into an Exchange Agreement with PEC and assign the sales agreement to us. At the closing, the proceeds will be paid directly to PEC for your account. You then have 45 days within which to find and identify replacement property. Assuming replacement property is found, you enter into an agreement to purchase that property, and, at closing, PEC pays the exchange funds it is holding for you to purchase that property. The replacement property must be acquired within 180 days after the sale of your relinquished property or by the due date of your tax return, whichever is earlier.
Simultaneous exchanges are rare. One kind of simultaneous exchange is a true swap, where two people swap titles to their properties. What most people mean when they refer to a simultaneous exchange, however, is an exchange structured identically to a deferred exchange, but all to happen on the same day. Here, you already know what you're going to buy and you're going to use the proceeds from your sale to buy it. Don't make the mistake of assuming that you can accomplish a simultaneous exchange by having money from the closing on your sale wired to the closing on your purchase without using an intermediary: If the funds are deemed to be under your control for even a second, your exchange may fail. An exchange that is anything but a two-party swap, even if simultaneous, requires use of a QI.
There will be times, especially when the market is hot, when you may need to acquire your new property before you've managed to sell your old property. You are then in position to do a reverse exchange. The IRS has specifically authorized this type of exchange as long as special rules are followed.
Using a qualified exchange accomodation agreement (QEAA), the property that you will ultimately acquire is "parked" with an entity formed by PEC. The parked property will be conveyed to you after the sale of your old property is completed. While you are waiting to close on the sale of the relinquished property, you may enter into a lease or management arrangement with the intermediary to make use of the replacement property.
There are many issues, such as financing, conveyancing, insurance, and leasing, that make a reverse exchange more complicated than a standard deferred exchange. Hence, a reverse exchange requires advance planning.
Another common exchange scenario is the following: a business owner wants to sell the property in which his present facility is located and replace it by constructing a new building on a vacant piece of land. Section 1031 does not allow you to sell your old facility, buy a piece of land, put up a building and defer the tax on all of that money. Instead, Section 1031 requires that acquisition of the replacement property be the last thing that happens. This means that the improvements will have to be constructed on the new parcel before you purchase it. Again, an intermediary can facilitate such exchanges by acquiring the new property, constructing the improvements, and then exchanging it for the old property.
Personal Property Exchanges
You can benefit from an exchange of personal property as well as real estate. Like real estate exchanges, the personal property you exchange must be used in a trade or business or held for investment. Personal property exchanges are more limited than real estate exchanges, however. Instead of being able to exchange one kind of personal property for any other kind (e.g., an airplane for a car), appropriate exchanges are governed by the North American Industry Classification System (NAICS) Rules (see www.census.gov/naics). The NAICS manual ascribes a number to just about any product there is. Your relinquished and replacement properties must be in the some product or asset class in order to qualify for exchange treatment.
Although most personal property does not appreciate significantly and thus would not seem to warrant exchanging, there is another reason to exchange these properties: depreciation recapture. Personal property used in a business is often depreciated relatively quickly. When that property is sold all of that depreciation is recaptured as ordinary income and taxed at regular income tax rates to the extent of the gain recognized. In a 1031 exchange, that tax is deferred.