1031 Exchange / Finance Terms Flashcards
Requires borrower to payoff the loan upon sale of the property.
- Alienation Clause
- Prepayment Clause
- or More Clause
- Lock-in Clause
- Alienation Clause
Alienation Clause
• Requires borrower to payoff the loan upon sale of the property.
• Also called due on sale clause
Loan Assumption
• Allows a buyer to assume responsibility for the full payment of the
loan with the lender’s knowledge and consent.
Prepayment Clauses
• Allows a lender to collect a certain percentage of a loan as a penalty for early payoff.
• When lenders make loans, they calculate their return over the term of the loan.
• If a loan is paid off early, the lender receives less interest and the return on investment is lower than planned.
Or More Clause
• Allows a borrower to pay off a loan early, or make higher payments
without penalty.
Lock-in Clause
• Prohibits borrowers from paying off a loan in advance.
• It is not allowed on residential units of less than four units.
• Do not confuse with RATE LOCK.
Allows a mortgage lender to call the entire note due if loan is in default.
- Alienation Clause
- Prepayment Clause
- or More Clause
- Acceleration Clause
- Acceleration Clause
Acceleration Clause
• Allows a mortgage lender to call the entire note due if loan is in default.
• Applies to a Mortgage as the security instrument and NOT the deed of Trust.
• Do not confuse with Alienation Clause.
If the property does not bring enough money at a foreclosure sale to pay off the liens, the creditor may be able to obtain a:
- Deficiency Judgement
- Notice of Default
- Recourse Loan
- Credit Bid
- Deficiency Judgement
- If the property does not bring enough money at a foreclosure sale to pay off the liens, the creditor may be able to obtain a deficiency judgment against the debtor for the remaining debt.
- A deficiency judgment requires a separate court action.
- California law protects the borrower (Trustor) from a deficiency judgment if foreclosure occurs via non-judicial foreclosure, trustee’s sale. If a lender (beneficiary or mortgagee) chooses to foreclose a trust deed with a power of sale using a trustee sale, no deficiency judgment is allowed if the proceeds do not satisfy the debt and all costs.
if the lender sues Borrower in Court
• Personal Commitment to repay a debt.
• Also called a Recourse Loan
Credit bid
• Lender bids the full amount of the outstanding debt at the foreclosure sale.
Selling a note for less than the face amount or the current balance.
- Subordination
- Discounting the note
- Short Sale
- Open-End-Loan
- Discounting the note
Discounting a note
• Selling a note for less than the face amount or the current balance.
• Even though the seller receives a reduction in value by the mortgage broker, it is one way a seller can get cash out of a trust deed that was carried back.
Unsecured Loan
• Lender receives a promissory note from the borrower, without any security for payment of the debt.
• The only recourse is a court action to force payment.
Open-End Loan
• Revolving line of credit.
• An additional amount of money may be loaned to a borrower in the future under the same trust deed.
• The effect is to preserve the original loan’s priority claim against the property with this open-end loan.
Seller Financing - All-Inclusive Trust Deed (AITD)
• Wraparound mortgage.
• Junior loan and subordinate to existing encumbrances because the AITD is created later.
• This means any existing encumbrances have priority over the AITD, even though they are included, or wrapped, by the new all inclusive trust deed.
A loan that is used primarily in the sale of a business. Includes both the Real Property and the Personal Property of the business:
- Blanket Loan
- Package Loan
- Swing Loan
- Construction Loan
- Package Loan
Package Loan
• Used primarily in the sale of a business.
• Includes both the Real Property and the Personal Property of the business:
• Equipment
• Patents, Branding and Trademarks
• Goodwill
Blanket Loan
• Covers more than one parcel of property
• Usually contains a partial release clause that provides for the release of any particular parcel upon the repayment of a specified part of the loan.
• Deed of partial reconveyance is recorded to show that the obligation has been met.
Swing (Bridge) Loan
• Temporary loan made on a borrower’s equity in his or her home.
• Usually a short-term loan that is due in six (6) months or when the borrower’s home sells, whichever occurs sooner.
• It is used when the borrower has purchased another property, with the present home unsold, and needs the
cash to close the sale of the new home.
Construction Loans
• Two phases—the construction phase and completion.
• An interim loan is a short-term loan to finance construction costs, such as the building of a new home.
• The lender advances funds to the borrower as needed while construction progresses.
• Since it is a high-risk loan it has a higher interest rate.
• Upon completion of the construction, the borrower must obtain permanent financing or pay the construction loan in full.
For a 1031 Tax-Deferred exchange:
- Reduces your property tax liability
- Is a tax free exchange of like properties
- Allows personal residence in exchange with investment property
- It allows an investor to exchange a property for a LIKE property
- It allows an investor to exchange a property for a LIKE property
1031 Tax-Deferred Exchange
• Is a method of deferring tax liability.
• It allows an investor to exchange a property for a like property
• Defers the gain until the property is sold.
• It is not really a tax-free exchange. The taxes are simply put off until a later date.
• The exchange can be simultaneous or non-simultaneous (deferred).
• The deferred exchange is often called a Starker exchange.
• Starker exchange, the investor must identify a replacement property within 45 days from the date the
relinquished property is sold
• Must go to settlement on the replacement property within 180 days from the previous sale.
• Two-party, simultaneous exchange seldom occurs because it is difficult to find two parties with
properties of equal value who are willing to trade.
Most real property qualifies a LIKE property as long as it is:
- Same value or less of the original property
- Is within the same state as the original property
- Property held as an investment
- Personal residence if exchanged with an investment property
- property held as an investment
1031 Tax-Deferred Exchange
• Most real property qualifies as like property, as long as it is held as an investment.
• It may be investment property (raw land), property held for the production of income (apartment or commercial building), or property used in a trade or business (an operating business).
• Personal residence would not qualify as a like property in an exchange with investment property.
• Principles Residences are exempt from Capital Gains if:
• Lived in for 2 or the last 5 years.
• Subject to the following limitations:
• Married Couple $500,000
• Single Family $250,000
If equities are not equal in two properties being exchanged, money or anything of value (cars, boats, stocks, furniture), other than like-kind property, may be put in by the investor who is trading up to balance the equities. This is called:
- Boot
- Value exchange
- Equity match
- Excessive Boot
- Boot
If equities are not equal in two properties being exchanged
• money or anything of value (cars, boats, stocks, furniture), other than like-kind property, may be put in by the investor who is trading up to balance the equities.
• This extra cash or non like-kind property put into an exchange is known as boot.
• The person who receives boot will be taxed on the net amount received up to any gain recognized from the exchange.
• If the amount of the boot exceeds the amount of the gain, tax liability is limited to the amount of the gain.
- Always recommend that your clients and customers see a tax specialist for their special needs before making any decisions to purchase or sell property.
- As a real estate agent, never give tax advice
