SIE Understanding Products and Their Risks Question 72: Answer and Explanation

Question: 72

Which of the following is correct regarding a Section 1031 Tenant in Common (TIC) transaction?

• A. One intention is to delay payment of realized capital gains tax.
• B. Section 1031 requires the identification of candidate replacement properties within thirty days of the sale.
• C. Section 1031 requires the purchase of the replacement property within one year of the sale.
• D. Section 1031 exchanges are not valuable, when compared with the activity involved in complying.

Correct Answer: A

Explanation:

A: Choice A is correct because Section 1031 of the Internal Revenue Code allows funds from a real estate sale to be used to purchase another property and not pay capital gains tax on the realized gain in that tax year. Choice B is incorrect because Section 1031 allows forty-five days to find possible purchases. Choice C is incorrect because Section 1031 allows the purchase to be completed by the earliest of the following: one hundred eighty days from the date of sale, or the last income tax filing date for that year. Choice D is incorrect because a Section 1031 exchange can be very profitable by allowing the funds that would otherwise be paid as tax on a large realized capital gain, to be re-invested in another real estate property.