A “1031 exchange” allows an investor to defer the capital gains taxes that would otherwise be due on the sale of an investment property if an investment property of like kind is acquired under Internal Revenue Code (IRC) section 1031. Specific IRS regulations for 1031 exchanges are laid out in Treasury Regulation section 1.1031.
180 DAY PROPERTY ACQUISITION DEADLINE
A 1031 investor is legally required to complete a 1031 exchange by midnight on the 180th day after the close of escrow on the relinquished property. The day after escrow closes on the relinquished property is the first day. The exception to this occurs if the investor's tax return is due before the 180th day, in which case the exchange must be completed by the due date of the investor's tax return. This 180-day period includes weekends and holidays.
26 CODE OF FEDERAL REGULATIONS (C.F.R.)
Title 26 of the Code of Federal Regulations (C.F.R.) contains the Treasury Department’s official and binding interpretations of Title 26 of the United States Code. These are also called “Treasury Regulations” (Treas. Reg.). When the IRS proposes new Treasury Regulations, they are published in the Federal Register for notice and comment. Temporary and final regulations are then published in the Federal Register and in the Internal Revenue Bulletin as “Treasury Decisions,” prior to ultimate publication in Title 26 of the Code of Federal Regulations. Therefore citations of these regulations may begin “26 C.F.R.” or simply “Treas. Reg.”
[1031Gateway hosts the full text of 26 C.F.R. 1.1031(k)-1 here for convenience. All sections of Title 26 are available in the official e-CFR here, and they are typically updated within two days after changes become effective. Cornell University Law School’s Legal Information Institute also hosts the full text of 26 C.F.R. here.]
26 UNITED STATES CODE (U.S.C.)
Title 26 of the United States Code (U.S.C.) contains the Internal Revenue Code (IRC). The IRC is the principal body of domestic statutory tax laws enacted by the United States Congress. It is organized topically, and covers income tax, payroll taxes, gift taxes, estate taxes, and excise taxes. Citations of the code may begin “26 U.S.C.” or simply “IRC”
[26 U.S.C. is available online here. However it is only current through the 1st session of the 112th Congress, which was convened in 2011. The U.S.C. Classification Table is also available online here, which shows where recently enacted laws will appear in the U.S.C.]
45 DAY IDENTIFICATION DEADLINE
A 1031 investor is legally required to identify replacement property options by midnight on the 45th day after the close of escrow on the relinquished property. The day after escrow closes on the relinquished property is the first day. This 45-day period includes weekends and holidays. Read our in-depth article on 1031 exchange property identification rules here, and calculate your 45th day here.
A property's "basis" is the amount of capital that the IRS considers an owner to have in the property. In most cases, the basis of a property is its purchase price or its fair market value at the time it was acquired or inherited. Basis is used to calculate depreciation and capital gains or losses. For example, if a property's basis is $500,000 and it sells for $800,000, the capital gains is $300,000 ($800,000-$500,000 = $300,000).
An investment offering's "cap rate" represents the annual net operating income received from an investment (prior to and excluding debt cost), divided by its purchase price or fair market value. Cap rate does not reflect the potential impact that financing can have on the cash flow. It differs from "cash-on-cash," which is the cash income received by an investor in return for the cash invested. Cash-on-cash does reflect the potential impact that financing can have on the cash flow. It is important to look at both metrics when evaluating an investment.
An investment offering's "cash-on-cash" (COC) is the cash income received by an investor in return for the cash invested. COC reflects an investment's net income after accounting for the cost of servicing the debt utilized. It differs from "cap rate," which represents the annual net operating income received from an investment (prior to and excluding debt cost), divided by its purchase price or fair market value. Cap rate does not reflect the potential impact that financing can have on the cash flow. It is important to look at both metrics when evaluating an investment.
CODE OF FEDERAL REGULATIONS (C.F.R.)
The “Code of Federal Regulations” (C.F.R.) consists of the administrative laws that promulgate the United States Code (U.S.C.). The U.S.C. is created by Congress and is subordinate only to the Constitution. The C.F.R. is subordinate to the U.S.C., and is created by the various executive departments and agencies to which Congress delegates limited rule-making authority. When a department or agency proposes new regulations, they are published in the Federal Register for notice and comment. Temporary and final regulations are then published in the Federal Register again, and ultimately compiled in the C.F.R.
[The official e-CFR is available online here, and is typically updated within two days after changes become effective. Cornell University Law School’s Legal Information Institute also hosts the full text of the C.F.R. here.]
Gross income is constructively received when it is made available without substantial limitations (26 C.F.R. 1.451-2). This means that you don’t have to physically hold cash in your hands to be taxed. For example, if a check for your funds is delivered to you, or if your funds are deposited into your account, you are in constructive receipt of those funds. An investor wanting to defer capital gains taxes under IRC § 1031 cannot take constructive receipt of the proceeds of the sale of the relinquished property. Rather, the proceeds must be held by a Qualified Intermediary.
Proposed legislation that would impact revenue or spending must be analyzed and assigned a score that distills its fiscal impact into a single number. Some scoring methods attempt to forecast how the behavior of individuals within the economy will change after the legislation is passed, and then incorporate the economic impact of those changes into the final score. These methods are typically described as "dynamic scoring" methods, even though standard "static" scoring methods typically include some dynamic elements and/or are provided in conjunction with similar forecasts. Dynamic scoring tends to produce results in favor of more conservative policies that recommend cutting taxes, and so are often favored by conservatives, while critics often argue that dynamic scoring methods are too simplistic, subjective, and optimistic to be relied upon for policy-making.
ORIGINAL PURCHASE PRICE
A property’s “original purchase price” is the amount the owner paid to acquire it. This is the starting line for calculating the basis of a property.
REVENUE PROCEDURE 2002-22
A "Revenue Ruling” (Rev. Rul.) is a public declaration by the Internal Revenue Service that explains how the tax code applies to a particular situation. Revenue Rulings state the official position of the IRS, and can be relied upon by all taxpayers. Revenue rulings are published both in the Federal Register and in the Internal Revenue Bulletin. The numbering system for Revenue Rulings corresponds to the year in which they are issued. For example, Revenue Ruling 2004-86 is the eighty-sixth Revenue Ruling issued in the year 2004. Revenue rulings are different from Revenue Procedures.
A “Sponsor" is "any person who divides a single interest in the Property into multiple co-ownership interests for the purpose of offering those interests for sale" (Revenue Procedure 2002-22, section 4). Sponsors are typically Real Estate companies that research and acquire properties, arrange financing, organize management, and structure ownerships interests for sale to investors.
"Tenant-in-Common” (TIC) is a way of holding title to real estate in which each owner is deeded an undivided, fractional interest. Revenue Procedure 2002-22 increased the popularity of TIC investments by more-officially recognizing them as valid replacement properties for use in 1031 exchanges. [Click here to read more about the Tenant-in-Common ownership structure.]
The “total return” of an investment, or pool of investments, is the sum of all categories of return to an investor, including any income, principal reduction, and capital gains. Total return may be expressed as a total or annualized percentage or as a simple dollar amount representing the aggregate of all of the components that made up the return.
A company's’ “total revenue” comprises all money actually received during a specified period. It accounts for discounts and returns, as well as any interest or dividends derived from investments or other activity outside a company's core business. Total Revenue differs from Gross Sales in that Gross Sales do not account for losses due to discounts, unpaid invoices, or returns, or for gains due to activities outside core business operations such as investments or the sale of company assets. Total Revenue is called "Gross Income,” the "Top Line," and sometimes “REVs."
TOTAL SALES COST
The “total sales cost” of a property includes all of the expenses incurred as a result of selling or relinquishing it. This includes property inspections, sales commissions, loan fees and escrow fees. Sales costs may be deducted from the total sales price of a property prior to calculating capital gains.
TOTAL SALES PRICE
A property’s “total sales price” is the amount the buyer paid to acquire it, including sales costs and any remaining debt on the property, whether it will be paid off with the proceeds immediately. This is the starting line for calculating the gross proceeds from the sale.
“Total yield” may refer to slightly different aspects of an investment's return. For example, it may be used to describe the sum of the cash flow distributions and the payments on the principle of a loan (principal reduction), in order to show that investors benefit from the income of the offering beyond just the cash flow. In such a context and during the operating stage of an investment, total yield would not include potential capital gains. However, after an investment has been sold and capital gains have been realized, it is not uncommon to include capital gains when discussing "total yield.” It is important to understand the components that make up total yield to distinguish between net income (realized currently on an ongoing basis), principal reduction (realized after a sale or refinance), and capital gains (realized after a sale or after all capital has been returned via the cash flow or a refinance.
TREASURY DECISIONS (TD)
“Treasury Decisions” (TD) are temporary or final Treasury Regulations published in the Federal Register and in the Internal Revenue Bulletin.