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Glossary

Equity Marketing:
The merchandising of properties exclusive of cash, or at least the majority of the values transferred is in the form of encumbered value in real property.

 

Section 1031:

Section 1031 is a provision of the Internal Revenue Code (IRC) that allows a business or the owners of investment property to defer federal taxes on some exchanges of real estate. 

  • Section 1031 allows investors in business properties to defer taxes on the profits of properties sold in order to raise cash to purchase other properties.

  • It is sometimes called the Starker Loophole because the sale and purchase do not need to be simultaneous to qualify for the tax deferral.

  • The Section 1031 benefit is not available to sellers or buyers of personal homes.

Rules for Using Section 1031:

Section 1031 defers tax on swaps of like-kind real estate done in a timely manner. There are a number of important steps to a properly structured 1031 exchange: 

  • The real estate purchased with the proceeds must be like-kind.

  • The tax must be paid on any “boot” in the year of the 1031 exchange. A boot is an addition of value to the swap that is not real estate.

  • Once the business or investment real estate is sold, like-kind real estate must be identified within 45 days and acquired within 180 days

About Like-Kind Real Estate

Section 1031 defines like-kind as real estate that is held for productive use in a trade or business or for investment purposes. Section 1031 defers tax when this real estate is exchanged in a properly structured 1031 exchange for like-kind real estate that continues to be held for productive use in a trade or business or for investment.

  • Like-kind properties are real estate assets of a similar nature that can be exchanged without incurring any tax liability under Section 1031 of the Internal Tax Code.1

  • Properties must be held for business or investment purposes but do not need to be similar in grade or quality.

  • Primary residences do not qualify for a 1031 exchange.2

  • Properties must be held in the United States in order to qualify as like-kind.

About the "Boot"

Section 1031 allows an investor to give or receive cash or other property that is not like-kind in addition to the like-kind real estate being exchanged. Such additions to the deal, when given or received in a 1031 exchange, is called “boot.”  IMPORTANT: To qualify, the investor must use the proceeds of the real estate sale for the new real estate investment within 180 days or the due date of the tax return.

The boot triggers taxable gains or losses in the year of the exchange. The taxable amount that is not deferred by Section 1031 is the amount of the boot. The taxable amount that is deferred by Section 1031 is the capital gain or loss on the like-kind real estate exchanged.

Timing of the Exchange

Section 1031 gives a taxpayer who sells business or investment real estate 45 calendar days from the closing to identify up to three (and under certain circumstances four or more) like-kind replacement real estate properties.

The replacement must be acquired and the 1031 exchange completed by the earlier of 180 calendar days or the due date (with extensions) of the taxpayer’s return.

Source: Investopedia  https://www.investopedia.com/terms/s/section1031.asp

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