TM 1031 Exchange
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The simultaneous exchange is the oldest method of performing an IRC §1031 tax deferred exchange. There are basically three ways to perform a simultaneous exchange:

SWAP OR TWO-PARTY TRADE: Two parties exchange (“swap”) deeds with each other.

Advantages: No need for a Qualified Intermediary.

Disadvantages: Very difficult to find another party who wants to swap for your property. The other party has to want what you have at exactly the same time you want to acquire their property. Equity and debt must match on both properties to avoid
one party recognizing some “boot.”

THREE-PARTY EXCHANGE: An “accommodating party” is used to help facilitate the transaction for the Exchanger. In the Alderson format, title is passed through the Buyer. In the Baird format, title is passed through the Seller.

Advantages: No need for a Qualified Intermediary.

Disadvantages: There are many disadvantages with this approach. Most legal and tax advisors strongly discourage their clients from utilizing this method. One of the main reasons this approach is discouraged is that the “accommodating party” actually takes title to a property that they know nothing about. Since this party is on the chain of title, they are exposed to any issues associated with that property, including the potential to be involved with environmental issues. In addition, there is very little documentation besides the recording of the deeds to support that an exchange had been structured.

SIMULTANEOUS WITH A QI: A Qualified Intermediary is used to structure the exchange.

Advantages: The 1991 Treasury Regulations state that the only “safe harbor” for a simultaneous exchange is using the services of a Qualified Intermediary (“QI”). The QI provides written instructions to the closing officers, prepares the exchange agreement and other exchange documents and insulates the Exchanger from any “constructive receipt” issues. In addition, this format can be easily converted to a delayed exchange and eliminate the time pressure of trying to close the entire transaction simultaneously.

Disadvantages: Nominal cost for the QI services.

Even if properties close on the same day, one of these three methods must be used to perform a valid transaction. It is not sufficient to merely wire proceeds from the sale closing to the purchase closing on the same day and obtain tax deferral. If the Exchanger has “constructive receipt” of the funds, even if only for a few minutes or hours, the transaction no longer qualifies for tax deferral.

TM 1031 Exchange and Asset Preservation, Inc. do not give tax or legal advice. The information contained herein should not be relied upon as a substitute for tax or legal advice obtained from a competent tax and/or legal advisor.
(c) Copyright 2005 Stewart Title Guaranty Company

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