Terminology in 1031 Exchange

Using the 1031 exchange is a great way to diversify your investment portfolio and generate passive income. However, it comes with its own terminology. So, if you’re considering this type of investment, it’s essential to understand each aspect of the process.

Let’s discover some basic terminology that will help you better understand the 1031 exchange process:

1. What is the Basis Value?

The basis value in a 1031 exchange refers to the cost or value of the property you are selling.

It’s the amount you originally paid for it, plus any improvements or renovations you’ve made over time. When you sell this property, you must pay taxes on your capital gains, which is the difference between the sale price and the basis value.

However, in a 1031 exchange, you can defer these taxes by reinvesting the proceeds into another property of equal or greater value. This allows you to continue growing your investment portfolio and defer your tax liability.

For example, if you sell a rental property for $500,000 and your original basis value is $400,000, your capital gains tax would be based on the $100,000 difference. But if you reinvest the proceeds in another property, you can defer this tax liability.

2. What is Downleg?

The downleg property is the replacement property you purchase in a 1031 exchange.

This property must be of equal or greater value than the property you sold and must be identified within 45 days of the sale. The downleg property is the second transaction in the exchange, where you reinvest the proceeds from selling your original property.

This property must be held for a specified time to qualify for a 1031 exchange. During this time, you can’t use it as your primary residence or vacation home or sell it for at least two years. Failure to meet these requirements can result in tax penalties and penalties from the IRS.

3. What’s a Boot?

A boot, or non-like-kind property, refers to cash or other assets received in a 1031 exchange that don’t qualify as replacement property.

When you sell your original property, any remaining cash is considered boot and is subject to capital gains tax. Additionally, the difference is considered boot and taxable if you receive property of lesser value than the property you sold.

For example, if you sell a property for $500,000 and use $400,000 to purchase replacement property but receive $100,000 in cash, the $100,000 is considered boot and will be subject to capital gains tax.

Navigating the 1031 exchange process can be overwhelming, but understanding the terminology is essential. Knowing the basis value, downleg, and boot can help you make informed decisions and avoid costly mistakes.

At RE/MAX Commercial Real Estate Advisors Group, we have experienced professionals who can guide you through the 1031 exchange process and ensure a successful transaction.


Contact us today to learn how we can help you understand better a 1031 exchange!


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