Definition of "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.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Real Estate Terms

Losses arising from damage to or destruction of property. ...

Financial characteristics or standards that a potential investor is evaluated on to judge his or her suitability for a particular investment program. For example, to determine whether a ...

Business entity providing water services in a particular locality. ...

The imposition or collection, usually by legal or governmental authority, of an assessment of a specified amount. An example is a tax assessment on real estate. ...

The floor of a building closets to the building grade. Normally, the ground floor of a building is the first floor. A ground floor can sometimes be located between the first floor and the ...

An insect, such as a termite, that "eats into" the wood and destroys it. This can cause significant damage to the home. Most states have laws that require termite inspection and ...

Net return on a real estate investment. It equals the income less the expenses associated with the property. ...

This situation applied in some states when death prevents the seller of property, who has signed a real estate sale agreement, from completing the sale. In this situation , equitable ...

Insurance affording protection against losses due to damage to or destruction of property or contents therein. Insurance protects assets and any future income thereon from loss, such as a ...

Popular Real Estate Questions