CES Tax Implications & Benefits

Question 1

What is the primary tax benefit of completing a successful 1031 exchange?

Accepted Answer

Deferral of capital gains tax on the sale of investment property

Answer

A 1031 exchange defers — but does not eliminate — capital gains tax, allowing the taxpayer to reinvest the full proceeds.

Question 2

Under IRC Section 1031, what happens to the taxpayer's basis in the replacement property?

Accepted Answer

It carries over from the relinquished property (substituted basis)

Answer

The taxpayer's basis in the replacement property is the substituted basis — generally the adjusted basis of the relinquished property carried forward.

Question 3

What is depreciation recapture, and how does it affect a 1031 exchange?

Accepted Answer

Depreciation recapture is deferred along with the capital gain in a successful 1031 exchange

Answer

In a successful 1031 exchange, depreciation recapture (taxed at 25%) is also deferred along with the capital gain.

Question 4

If a taxpayer continuously completes 1031 exchanges throughout their lifetime and holds the final property until death, what happens to the deferred gain?

Accepted Answer

The gain is permanently eliminated through the step-up in basis at death

Answer

Heirs receive a stepped-up basis to fair market value at the date of death, permanently eliminating all deferred gain from prior 1031 exchanges.

Question 5

Which tax rate applies to unrecaptured Section 1250 depreciation when it becomes taxable?

Accepted Answer

25%

Answer

Unrecaptured Section 1250 depreciation is taxed at a maximum rate of 25% when recognized.

CES - Certified Exchange Specialist Practice Test

CES - Certified Exchange Specialist Practice Test

CES Tax Implications & Benefits