Tax Free Exchange
Transfer of real estate from one taxpayer to another that are exempt from federal income taxes. An example is an exchange of property in which ownership of transferred real estate is still kept. In the year of exchange, there is no recognized gain or loss. However, there is an adjustment to basis of the property received in the transfer, in effect deferring the gain upon future disposition.
1031 Tax Free Exchange
Also called a like-kind exchange. An exchange in which tax benefits are available to real estate owners planning to sell their investment, rental, business or vacation real estate, and reinvest the net proceeds in other real estate.
Real Estate held for these purposes are called like-kind/1031 properties. Property owners may sell like-kind properties and defer taxes on the sale's profits by meeting the requirements of Internal Revenue Code (IRC) 1031 exchange. The purpose of the 1031 exchange is to allow sellers of like-kind property to buy replacement property of like-kind within a specific time period and defer taxes. The deferred profit tax benefit applies despite a time lapse between the sale of the taxpayer's former property and his purchase of replacement property. This sell-now, buy-later situation is called a delayed exchange.
The 1031 exchange applies only to property other than the personal residence or dealer property. Specifically included for exchange are properties used or held for rental income, business purposes, investment, or as vacation homes. Taxwise, investment properties include vacant land held for profit, ground leases and management-free triple net lease. An owner of these qualifying like-kind properties can complete a 1031 exchange, but he must follow the to time constraints.
A 1031 exchange differs from the more informal 1034 tax deferred rollover, which applies to a personal residence and has more lenient deadlines. Unlike a 1034 rollover, a 1031 exchange has different deadlines and other criteria. The replacement property must be acquired before 45-day and 180-day deadlines have run. Note that often, brokers are unable to arrange a nearly simultaneous closing for both legs of an exchange.
Popular Real Estate Terms
Something that has been built and physically exists at a specified location, such as a building, garage, etc. Something consisting of related parts, such as the organization and terms of ...
In a broader sense, Full Disclosure means presenting all information (significant or not, classified or not) related to a certain matter. In Real Estate, the term “Full ...
When you hear someone in real estate saying there will be a boring test, they don't mean a dull exam is coming up. What is a soil boring test? Let's find out the meaning of a boring test! ...
The individual who receives an interest in a life estate after the original life tenant's interest expires. This normally occurs after the death of the life tenant. For example, Mrs. ...
Legal order for a person to present at a deposition or trial documents in his possession, such as related to a real estate transaction. ...
Unit of measure for the change in interest rates for loans. One basis point equates to 1 percent of 1 percent, that is, 0.01 percent. Therefore, one hundred basis points equals 1 percent. ...
Landlord's right to receive the value of the tenant's property to pay for unpaid rents or for damages to the leased premises. ...
Current cost to replace property with an identical property after allowing for the depreciated value of the property. ...
A partition or wall that provides no support to the structure in which it is located. For example, a nonbearing partition or wall does not support any floors above it. A partition which ...
Have a question or comment?
We're here to help.