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
The definition of accommodation covers different meanings of the word, but they all express providing space, room, either physical or metaphorical. In other words, accommodation can be ...
Provision in a loan agreement where a debtor authorizes a judgment against him in the event of a default. These agreements are widely restricted, but when they are lawful, the creditor is ...
If buyers are considering a home with an assumable mortgage at a fair interest rate or if the sellers have already paid their mortgage, remember to consider seller financing. With seller ...
Clause in a mortgage that allows the borrower to pay more than the monthly amount and to retire the loan early without a penalty. ...
Governmental body having the responsibility for planning the future development of a jurisdictional area. A planning commission is responsible for developing and managing a zoning ordinance ...
A fund constituted in certain states to compensate aggrieved individuals who incurred losses in a real estate transaction associated with a licensed real estate broker or agent. Normally, ...
Directly enhancing the physical nature of the property such as renovating the building, installing a new driveway and parking lot, and gardening. ...
What Is a Real Estate Bubble? One definition for a real estate bubble is the fast increase in prices, usually driven by investors and speculators in major urban areas. Properties are ...
In general terms, the upside potential signifies the potential of a present investment, be it an asset or property, to bring a profit for the investor in the future. This measure enables ...
Have a question or comment?
We're here to help.