Buying a property can be overwhelming. You will deal with realtors, banks, mortgage brokers, loan apps, closing disclosures, credit reports, contracts, appraisals, inspections, warranties, walk-throughs, escrows, earnest money, insurance, taxes… and the list goes on. Undoubtedly you will hear words you have never heard before. Therefore, FTIC has a glossary to help you better understand commonly used terminology in the real estate industry.
1031 Exchange: Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC §1031 is tax-deferred, but it is not tax-free. Both the relinquished property you sell and the replacement property you buy must meet certain requirements. Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment. The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. Notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient. The second limit is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above. See, IRS FORM 8824 Like-Kind Exchanges (PDF), Sales and Other Dispositions of Assets PUBLICATION 544.