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
Combination of two or more real estate brokerages into one, with only one company retaining its identity. Typically, the larger of the two companies is the company whose identity is ...
To create an encumbrance. ...
Written obligation of a borrower that is backed by collateral in the event of default. The lender must assure himself that the market value of the security equals or exceeds the amount of ...
Examining and testing the ground to determine the conditions for building something, such as an office building. ...
A lease contract extending ten years or more. ...
(1) Surrendering voluntarily or involuntarily ownership of property or an interest therein. (2) Court order to give up possession or the right to property such as in the case of an ...
An administrator appointed by the government or the courts to administer the laws relating to a government agency or court. A commissioner is a part of a government or court commission. ...
An amount of money provided for in a contract as compensation if the contract is not fulfilled. An example is an offer to buy real property that includes a provision that once the seller ...
A binding judicial determination of the rights and standing of litigants. A declaratory judgment does not result in any relief for the action brought before the court. It merely ...
Have a question or comment?
We're here to help.