REALTORŪ Magazine Online: The real estate professional's business support tool.

OFFICIAL MAGAZINE OF THE NATIONAL ASSOCIATION OF REALTORS®
  

QUIZ RESULTS: 1031 Exchanges

You answered 0 out of 10 questions correctly.

Looks like you could use more information about 1031 exchanges. After all, besides the tax-deferral perk, like-kind exchanges can give your clients more funds to purchase a larger property and one with even more cash flow potential. Learn more by reading the Field Guide to 1031 Exchanges at REALTOR.org, and by visiting the 1031 exchange section of Bayview Financial Exchange Services.

1.In order for properties to qualify for a "like-kind" exchange, they must be:

You chose not to answer this question.
Correct Answer: Any type of real estate, as long as it's used as an investment or for business

The IRS considers virtually all real estate in the United States to be "like-kind." Thus, you could swap a farm for an apartment building, raw land for a motel, or a store for a single-family rental. However, the property you are selling and the property you are buying both must be held as an investment or for productive use in a trade or business.


2.To defer capital gains taxes, the replacement property you choose must:

You chose not to answer this question.
Correct Answer: Be of equal or greater value than the property you sold

If you purchase a replacement property worth less than the relinquished property, you’ll have to pay a capital gains tax on the difference. You also are required to reinvest all cash proceeds from the sale of your relinquished property on the purchase of your replacement property. Otherwise, you’ll have to pay taxes on the difference.


3.How many days from the closing date of your property's sale do you have to identify a replacement property?

You chose not to answer this question.
Correct Answer: 45 days

You have 45 days from the closing of the sale of a property to identify a replacement property or properties.


4.How many days from the closing date of your property's sale do you have to actually purchase a replacement property?

You chose not to answer this question.
Correct Answer: 180 days

You have 180 days from the closing date of your sale to purchase a replacement property. There's no exception to this rule — and closing in escrow doesn't count. Even if the 180th day falls on a Saturday, Sunday, or holiday, the closing still must occur no later than the 180th day; the closing wil have to be moved to the preceding business day. There also are no exceptions to the 45-day requirement for identifying replacement properties.


5.Which of the following purchases would qualify for a 1031 exchange?

You chose not to answer this question.
Correct Answer: 50 percent undivided interest as a tenant-in-common in real estate

A "tenancy-in-common" is a direct ownership interest in real estate. Each owner is considered to have an individual, undivided interest in a property. Therefore, owners can buy, sell, or place their property in a 1031 exchange without regard to the actions of the others. The other answer choices — bonds, stocks, and business partnerships — are not allowed under Section 1031 regulations.


6.Which of the following purchases would not qualify as a like-kind exchange?

You chose not to answer this question.
Correct Answer: A duplex used for your personal residence

Properties sold and purchased in a like-kind exchange must be held for investment or business use — neither can be your personal residence. A vacation home can qualify as an investment property as long as it's noted as an investment property on your income-tax return. However, vacation homes that are classified as second homes are usually excluded. (Property is considered a second home if it's used for personal purposes more than 14 days per year or for more than 10 percent of the time the property is rented at market rate, whichever figure is greater.)


7.Which of the following is not a rule that must be followed when identifying a replacement property or properties?

You chose not to answer this question.
Correct Answer: The Single Property Rule

When identifying a replacement property in a 1031 exchange, you're allowed to use any one of the following identification rules: The Three Property Rule, under which you identify more than three properties regardless of their value; The 200 Percent Rule, under which you identify more than three properties, provided that their total value does not exceed 200 percent of the value of the property sold; or the 95 Percent Rule, under which you identify any number of properties regardless of value, provided that you purchase 95 percent of their fair market value.


8.What is the most common type of 1031 exchange?

You chose not to answer this question.
Correct Answer: Forward Delayed Exchange

The most common type of exchange is the Forward Delayed Exchange, in which one property is sold and another property is purchased within 180 days. Other less common types include: Simultaneous Exchange, in which two properties are swapped or exchanged simultaneously; Construction Exchange, also known as a Build-to-Suit Exchange, in which funds from the sale of a property are used to construct improvements on the replacement property; and a Reverse Exchange, in which the replacement property is purchased before the sale of the relinquished property.


9.In a 1031 exchange, the term "boot" usually refers to:

You chose not to answer this question.
Correct Answer: Any cash proceeds not spent on the purchase of a replacement property during an exchange

Cash not spent on the purchase of a replacement property during an exchange, called boot, is fully taxable, regardless of the client's adjusted basis on the property. Boot also can be property the taxpayer receives in the exchange that does not qualify as "like-kind." Boot is taxed at federal capital-gains tax rates.


10.To conduct a like-kind exchange, you must use a "Qualified Intermediary" to facilitate the transaction. This person can be:

You chose not to answer this question.
Correct Answer: An independent third party recognized by the IRS as facilitators of 1031 exchanges

Qualified Intermediaries facilitate tax-deferred exchanges and should have a thorough understanding of 1031 regulations. Section 1031 says the Qualified Intermediary must be completely independent from the people doing the exchange. This excludes the lawyer, real estate practitioner, CPA, or anyone else who has been an agent or employee in the past two years of the people doing the exchange.