Escrow & TitleIntermediateAlabama Exam

In a 1031 exchange, a real estate investor:

AExchanges one property for personal property of equal value, under typical circumstances

BDefers capital gains taxes by reinvesting proceeds from a sale into like-kind propertyCorrect

CExchanges properties with another investor simultaneously

DConverts a residential property to commercial use

Why Defers capital gains taxes by reinvesting proceeds from a sale into like-kind property Is Correct

Answer B: Defers capital gains taxes by reinvesting proceeds from a sale into like-kind property

A Section 1031 exchange allows an investor to defer capital gains taxes by selling an investment property and reinvesting the proceeds into a like-kind replacement property.

Exam Tip: Escrow & Title

Escrow questions test the neutral third-party role and the sequence of closing events. Remember that the escrow agent acts as a dual agent for both buyer and seller and cannot advocate for either side.

Key Escrow & Title Terms in This Question

1031 Exchange

A tax-deferred exchange allowing investors to sell one investment property and reinvest proceeds in a like-kind property while deferring capital gains taxes.

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Key Terms to Know

1031 Exchange

A tax-deferred exchange allowing investors to sell one investment property and reinvest proceeds in a like-kind property while deferring capital gains taxes.

Short Sale

A sale of real property where the sale proceeds are less than the outstanding mortgage balance, requiring lender approval.

Comparable Sales (Comps)

Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.

Deed

A written legal instrument used to transfer ownership of real property from one party (grantor) to another (grantee).