Florida Real Estate Broker ExaminationReal Estate Finance and InvestmentMedium
A Florida real estate investor is selling a commercial property and wants to defer capital gains taxes by reinvesting the proceeds into another 'like-kind' investment property. This strategy is known as a(n):
- AInstallment sale
- BReverse exchange
- C1031 exchange
- DShort sale
Show answer & explanationAnswer & explanation
Correct answer: C. 1031 exchange
A 1031 exchange, or like-kind exchange, allows an investor to defer capital gains taxes when selling an investment property and reinvesting the proceeds into another similar investment property.
Why the other options are wrong
- A. An installment sale allows the seller to receive payments over time, deferring taxes, but doesn't require reinvestment into like-kind property.
- B. A reverse exchange is a type of 1031 exchange where the replacement property is acquired before the relinquished property is sold, but it's still a form of 1031 exchange.
- D. A short sale occurs when a property is sold for less than the outstanding mortgage balance, typically to avoid foreclosure.
1031 Exchange (Like-Kind Exchange)
A transaction under Section 1031 of the IRS tax code that allows investors to defer capital gains taxes on the exchange of 'like-kind' properties.
- Properties must be held for productive use in a trade or business or for investment.
- Strict timelines for identifying (45 days) and acquiring (180 days) replacement property.
- Requires the use of a Qualified Intermediary (QI).
Memory trick: 1031: Like-kind exchange, tax deferral's gain.