Two Party Swaps: Concurrent 1031 Exchanges

These type of 1031 exchanges are not that common, but they do happen on occassion. This post was triggered by a recent call that I received. The caller said that he wanted this other person's investment property and coincidentally the other person wanted an investment property that he had. He wanted to know if they merely "swapped" properties if that would qualify as a tax-deferred exchange.

Classic Two Party Swap

This is a classic two party swap or concurrent 1031 exchange. You might also hear it referred to as a simultaneous 1031 exchange. It is actually the most basic type of tax-deferred exchange or 1031 exchange and is the structure often used years ago before the current delayed exchange was allowed by the courts through the Starker cases.

You have two investors that simply want each other's investment property. This tax-deferred exchange is often over complicated by the parties involved when it should be a relatively straight forward tax-deferred exchange.

Concurrent Recording of Deeds

The procedures to complete this tax-deferred exchange are very simple. The two parties simply draw up deeds for each of their properties granting the property to the other party. The two deeds are then recorded concurrently or simultaneously, and you have accomplished the two party swap.

Property Market Values

This assumes of course that both properties are worth the same amount. One party may owe the other party a cash payment in order to "equalize" the values if the properties are not equal value. The party that receives the cash payment will recognize tax on the cash portion received or he or can set up a delayed tax-deferred exchange with a Qualified Intermediary or Accommodator.

Professional Qualified Intermediary

The use of a professional Qualified Intermediary is not generally needed when you are structuring a classic two party swap. However, you must make sure that everything is structured and recorded concurrently.

Investors often retain a professional Qualified Intermediary in order to make sure that the necessary steps are taken to protect the tax-deferred exchange transaction. This will ensure that the proper tax-deferred exchange documentation is completed accurately and there is no accidental error that could invalidate the tax-deferred exchange.

You might also want to review some of the blog posts on this subject on the Exeter Discussion Board.

Consult with Tax Advisor

Both parties should of course consult their tax advisor before proceeding with a two party swap in order to ensure that the values are correct. Any complication due to property market value or outstanding debt, etc., can be dealt with before recording the deeds.