1031 like kind exchange rules and core real estate investment analysis concepts for investors and agents.
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- What is a 1031 exchange?
- A transaction where a property owner trades real property for other like-kind real property while deferring capital gains tax.
- What qualifies as like-kind property in a 1031 exchange?
- Property of similar nature or character. Under current law, only real property qualifies; property types (residential, commercial, land) can be mixed.
- What is the 45-day rule in a 1031 exchange?
- The deadline to identify potential replacement properties, counted from the date the original property is sold.
- What is the 180-day rule in a 1031 exchange?
- The deadline to close on the replacement property, counted from the date the original property is sold.
- What is boot in a 1031 exchange?
- Cash or other unlike-kind property received in the exchange; any boot triggers capital gains tax on the amount received.
- Why is a qualified intermediary required in a 1031 exchange?
- The seller cannot directly touch the sale proceeds; a third party must hold the funds to preserve the tax-deferred status.
- What is a delayed 1031 exchange?
- The most common type, where the replacement property is identified and purchased after the sale closes.
- What is a simultaneous 1031 exchange?
- An exchange where the sale and purchase close at the same time, also called a direct exchange.
- What is the 3-property identification rule?
- A taxpayer can identify up to 3 replacement properties without additional restrictions under a 1031 exchange.
- What is the 200% rule in 1031 exchange identification?
- If more than 3 properties are identified, the aggregate fair market value of all identified properties cannot exceed 200% of the relinquished property's value.
- How is capitalization rate (cap rate) calculated?
- Net operating income divided by property value or purchase price, expressed as a percentage.
- What does a higher cap rate suggest about a property?
- Greater potential return on investment, but often indicates higher risk or a less desirable location.
- How is cash-on-cash return calculated?
- Annual cash flow (after all expenses and debt service) divided by the initial cash invested, expressed as a percentage.
- What is the debt service coverage ratio (DSCR)?
- Net operating income divided by total annual debt service (principal and interest payments).
- What DSCR do most lenders require?
- Typically 1.2 to 1.25 or higher, meaning the property must generate enough NOI to cover debt service by that multiple.