CES Exchange Structures & Strategies 1 — Questions and Answers
Question 1: In a delayed (Starker) exchange, what is the correct order of events?
- Acquire replacement property first, then sell relinquished property
- Sell relinquished property first, then identify and acquire replacement property within deadlines (Correct answer)
- Simultaneously sell and acquire both properties on the same day
- Identify replacement property first, then list the relinquished property
Correct answer: Sell relinquished property first, then identify and acquire replacement property within deadlines
In a delayed exchange, the taxpayer sells the relinquished property first, then identifies and acquires the replacement property within the 45/180-day deadlines.
Question 2: What distinguishes a 'reverse exchange' from a standard delayed 1031 exchange?
- In a reverse exchange, the taxpayer acquires the replacement property before selling the relinquished property (Correct answer)
- In a reverse exchange, no QI is needed
- In a reverse exchange, there are no identification or deadline requirements
- In a reverse exchange, the exchange is tax-free permanently
Correct answer: In a reverse exchange, the taxpayer acquires the replacement property before selling the relinquished property
A reverse exchange allows the taxpayer to acquire the replacement property first and then sell the relinquished property, with an EAT parking one of the properties.
Question 3: What is an 'improvement exchange' (also called a build-to-suit or construction exchange)?
- An exchange where the replacement property is improved using exchange funds held by the EAT before being transferred to the taxpayer (Correct answer)
- An exchange where the taxpayer builds a new property on relinquished land
- An exchange where improvements are made to the relinquished property before sale
- An exchange structure that allows exchange of raw land only
Correct answer: An exchange where the replacement property is improved using exchange funds held by the EAT before being transferred to the taxpayer
In an improvement exchange, the EAT holds the replacement property while improvements are made using exchange proceeds, then transfers the improved property to the taxpayer within 180 days.
Question 4: Which type of exchange involves two parties directly trading properties with each other?
- Delayed exchange
- Simultaneous exchange
- Two-party direct exchange (Correct answer)
- Improvement exchange
Correct answer: Two-party direct exchange
A two-party direct exchange (also called a swap) involves two taxpayers directly exchanging their properties with each other.
Question 5: What is a 'parking arrangement' in the context of a reverse or improvement exchange?
- The QI parks exchange funds in a money market account
- The EAT temporarily holds title to one of the properties to facilitate the exchange (Correct answer)
- The taxpayer parks the proceeds in a retirement account
- The replacement property is listed for sale while exchange proceeds are held
Correct answer: The EAT temporarily holds title to one of the properties to facilitate the exchange
A parking arrangement refers to the EAT taking temporary title to either the replacement or relinquished property to allow the exchange structure to work.
Question 6: Which IRS Revenue Procedure provides the safe harbor guidelines for reverse and improvement exchanges?
- Rev. Proc. 1990-12
- Rev. Proc. 2000-37 (Correct answer)
- Rev. Proc. 2010-14
- Rev. Proc. 2017-51
Correct answer: Rev. Proc. 2000-37
Rev. Proc. 2000-37 provides the IRS safe harbor for reverse and improvement exchanges using Exchange Accommodation Titleholders.
CES Exchange Structures & Strategies 1
In a delayed (Starker) exchange, what is the correct order of events?