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 Simultaneous exchanges are when you buy and sell your property at the same time. This sounds great because you do not have to transfer assets to another company. But the seller of the Replacement Property, the buyer of the Relinquished Property, and the exchanger must close their transactions at the same time. In addition, the exchanges are not granted any safe harbor treatment by the IRS. This means the IRS can challenge your exchange, even if you followed the proper guidelines.
With the advent of the new safe harbors, simultaneous exchanges are rare now. If you still intend to proceed with a simultaneous exchange, consider some of the following risks:
Environmental Risks
A simultaneous exchange, unlike other types of exchanges, generally involves sequential deeding rather than direct deeding (the simultaneous exchanges were not granted the safe harbor provisions of the Regulations issued in 1991 and 1992). This means that one of the parties will have to momentarily take title on a property that he/she knows nothing about. These environmental risks have become substantial in some cases.
Additional Closing Costs
In a simultaneous exchange, each closing will have double escrow and recording charges since there will be four closings instead of two closings (as in a delayed exchange). You will typically be the one who pays these extra fees.
More Costs in Accounting/Legal Review to Protect you from the IRS
Because simultaneous exchanges are currently under attack by the IRS, you will need to get competent counsel from an attorney and an accountant. A sale and a simultaneous purchase of property will not qualify as an exchange (all exchange requirements must be met) unless it is properly structured. The IRS looks very closely at the exchange requirements and the control of funds issue. The extra advice you will need for this type of exchange is generally very costly.
Problems with Timing of Closings
The IRS is concerned with recording dates and times. Difficulties arise on simultaneous exchanges when different closing agents are used for different transactions of the exchange and/or when different transactions of the exchange close in different time zones.
If you are still considering a simultaneous exchange, set up an appointment with us so we can further review these risks with you.
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