1031 Exchange Glossary
1031 Exchange: The sale or
disposition of real estate or personal property (relinquished property)
and the acquisition of like-kind real estate or personal property
(replacement property) structured as a tax-deferred, like-kind swap.
Accommodator: An unrelated
party who participates in the 1031 exchange to facilitate the
disposition of property. The Accommodator
has no economic interest except for any compensation paid as a service
to the 1031 exchange.
Adjusted Basis : The amount you
use to determine your capital gain or loss from a sale or disposition
of property. Start with the original purchase cost. Add closing costs,
your cost of capital improvements and principal payments of special
assessments (sewer and streets) and then subtract any
depreciation and any casualty losses.
Balancing the Exchange: A
balanced exchange ensures that the taxpayer defers 100% of taxes. To
achieve a balanced exchange:
1) acquire a replacement property that is
equal to or greater value than the relinquished property.
2) reinvest
all of the net equity from the relinquished property in the replacement
property.
3) assume debt on the replacement property that is equal
to or greater than the debt on the replacement property or contribute
cash to make up the deficiency
Basis: The amount you use to determine your capital gain or loss from a sale or disposition of property.
Boot: Non-like-kind property
given by one party to another party, Cash proceeds are the most common form of boot may be taxed.
Build-To-Suit Exchange: A
"Built-to-Suit" Exchange is one in which the replacement property to be
acquired doesnt exist and needs to be built.
Business Assets: Exchanging one business or its inventory for
another business is not permitted under IRS Section 1031. However,
taxpayers may exchange business assets
usually as part of a Mixed-Property (Multi-Asset) Exchange.
Capital Gain or Loss: The difference between the selling price of a property and its Adjusted Cost Basis.
Capital Gain Tax: Federal and state governments taxes on investments. Take the total selling
price of the relinquished property, less exchange expenses and adjusted basis. See adjusted basis.
Capital Improvements : The
expenses of permanently upgrading your property rather than maintaining
or repairing it.
Cash Boot: Cash Boot consists
of cash and non-qualifying property. A car, a boat all examples of Cash Boot.
Concurrent Exchange: A simultaneous
exchange takes place where both Properties are received at the same
time.
Simultaneous Exchange: The disposition of the relinquished property and the
acquisition of the replacement property close or transfer at the same
time.
Constructive Receipt: If
the Exchanger actually or constructively receives the exchange proceeds
or property the exchange may not qualify under IRS 1031
Cooperation Clause : Language
in the Sale Contracts requiring all parties
to cooperate in completing said exchange.
Deferral: The capital gains tax
is not paid until such time as the Exchanger sells the replacement
property.
Delayed Exchange: The
Replacement Property is received after the transfer of the Relinquished
Property. The Exchanger must identify all
potential Replacement Properties within 45 days from the transfer of
the Relinquished Property and the Exchanger must receive all
Replacement Properties within 180 days or the due date of the
Exchangers tax return whichever occurs first.
Depreciable Property: Property
with a useful life of more than one year. You can spread the cost of the asset over
its estimated useful life.
Depreciation: Wear-and-tear. The I.R.S. requires owners to
take a tax deduction on the amount of a propertys depreciation.
Depreciation Recapture: The
amount of gain resulting from a sale that
represents the recovery of depreciation expense.
Disposition : The sale or other disposal of property that causes a gain or a loss including like-kind exchanges.
Exchange Agreement: A written
agreement between the Qualified Intermediary and Exchanger setting
forth the Exchangers intent to exchange property under IRS section 1031 exchange.
Exchange Period: The period of
time during which the Exchanger must complete the acquisition of the
replacement property.
Exchanger: The owner of the
investment property in a tax deferred exchange. An
Exchanger may be an individual, partnership or corporation.
Exchange Period : The 180-day
window in which the exchanger must complete a tax deferred exchange.
During the exchange period there is a 45-day window in which the
exchanger must identify which property(s) will be purchased.
Excluded Property: Exchanges do not apply to property held for personal use: such as homes
boats or cars; cash; stock in trade or other property such as: inventories, raw materials and real estate held by
dealers; stocks, bonds, notes, partnership interests; certificates of
trust
Fair Market Value: The price at
which property would change hands between a buyer and a seller under no pressure to do so.
Fractional Interest : An undivided fractional interest or partial interest in property. See also Tenancy-In-Common.
Identification Period: The
period of time during which the Exchanger must identify potential
replacement property(s).
The period is 45 calendar days from the transfer of the Exchangers
relinquished property.
Improvement Exchange: When
the Qualified Intermediary holds title to the
replacement property on behalf of Exchanger, while some improvements are completed.
Improvements: Permanently upgrading your property rather than maintaining or
repairing it.
Intermediary: An unrelated
party to
facilitate the disposition of the two propertys. The
Intermediary has no economic interest except for compensation for services.
Like-Kind Exchange: The sale or
disposition of real estate or personal property
and the acquisition of like-kind real estate or personal property under 1031 exchange rules.
Like-Kind Property: Property
that is exchangeable with another property that isnt your personal
residence or a second home or such as homes boats or cars; cash; stock
in trade or other property held primarily for sale such as:
inventories, raw materials and real estate held by dealers; stocks,
bonds, notes, partnership interests; certificates of trust
Mixed Property (Multi-Asset) Exchange:
An exchange that includes different types of properties, such as:
personal property, real property, and intangible personal property.
Mortgage Boot/Relief: Mortgage
Boot consists of the mortgage given with the
relinquished property and the mortgage received with the replacement property. Mortgage boot received is a taxable
gain unless offset by cash boot added or given up.
Multiple Property Exchange: Disposition and/or acquisition of more than one property in a Section 1031 Exchange.
Parking Arrangement : A
procedure whereby either the relinquished property or
replacement property is acquired by an Exchange Accommodation
Titleholder ("EAT") in order to facilitate a reverse or
build-to-suit exchange transaction
Partial Exchange: When an
exchange involves receiving cash and/or non-like-kind
property and/or mortgage relief on the
replacement property as well as an exchange of qualified, like-kind
Personal Property Exchange: A
tax-deferred transfer of personal property for
other personal replacement property that are similar or like-class.
Qualified Escrow Account: A
trust where the trustee is not the Exchanger which limits the Exchangers rights to receive, pledge, borrow.
or The Qualified Escrow Account also
ensures that the Exchangers exchange assets are held as
fiduciary funds and are therefore protected against claims from
potential creditors of the Qualified Intermediary.
Qualified Exchange Accommodation Arrangement: The contractual arrangement between the Exchanger and the Exchange Accommodator
Titleholder (EAT)
Qualified Intermediary: The QI
is an unrelated party that participates in the 1031 exchange. The Qualified Intermediary
acts as the middle-man or "straw-man" in exchange transactions. The Q1 holds
the proceeds of the sale of the relinquished property and does any
buying or selling of the relinquished property
necessary on behalf of the exchanger
Qualified Use: An Exchanger
must use the property in their trade or business, to hold the property
for investment or income in order to meet the qualified use test.
Relinquished Property: The original property to be sold or disposed of by the Exchanger.
Replacement Property: The new property being acquired by the taxpayer when making an exchange .
Reverse Exchange: A tax-deferred, like-kind exchange transaction
whereby the replacement property is acquired first and the transfer of the relinquished property occurs at a later date.
Taxpayer: A taxpayer has property and would like to exchange it
for new property under
Section 1031.
Transfer Tax: A tax assessed by
a city, county or state on the transfer of property that may be based
on equity or value. The use of direct deeding in an exchange avoids
additional transfer tax.
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