1031 Exchange
A 1031 tax deferral which permits taxpayers to reinvest the proceeds from the sale of property held for investment or business purposes into another investment or business property, and defer capital gains tax that would otherwise be due on the initial sale.
Accommodator
A qualified intermediary who agrees to assist the exchanger in executing a tax-deferred exchange. Also described as a facilitator or an intermediary, a qualified intermediary cannot be the taxpayer, a related party, or an agent of the taxpayer.
Adjusted Basis
The original basis plus any improvement costs minus the full depreciation on the property. Once the adjusted basis is known, the gain or loss can be computed.
Basis in the Replacement Property
In an exchange, the deferral of the tax on the gain is accomplished by requiring the taxpayer to carryover (substitute) the basis of the relinquished property to the replacement property with suitable adjustments in the event additional consideration is paid.
Boot
Property the taxpayer receives in the exchange which does not qualify as "like kind property". Cash proceeds are the most common form of boot. Boot is subject to taxation.
Buyer
Individual that would like to purchase Taxpayer's Relinquished Property.
Capital Gain
The capital gain is calculated as follows: total selling price of the relinquished property, less exchange expenses, less the relinquished propertyˇ¦s adjusted basis. The adjusted basis is the original cost, plus the cost of capital improvements, less depreciation or cost recovery deductions. Capital gains may be subject to depreciation recapture and other rules of the IRS.
Class "A" Property
Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high quality standard finishes, state of the art systems, exceptional accessibility, and a definite market presence.
Concurrent Exchange
Also referred to as a simultaneous exchange when the exchanger transfers out of the relinquished property and receives the replacement property at the same time.
Constructive Receipt
Control of the cash earnings without real physical possession by the exchanger or their agent.
Deferral
Tax on an exchange transaction is not paid at the time of transaction but at the time the replacement property is sold. Deferral is accomplished by substituting, or carrying over the basis of the taxpayer's relinquished property to the replacement property making any necessary adjustments for additional consideration paid.
Deferred Exchange
Term currently used in place of "Non-Simultaneous Exchange" or "Starker Exchange." A type of exchange where the exchanger utilizes the exchange period.
Delayed Exchange
Also known as non-simultaneous, deferred, and Starker. A delayed exchange is when the replacement property is received following the transfer of the relinquished property. All potential replacement properties must be identified within 45 days from the transfer of the relinquished property and the exchanger must receive all replacement property within 180 days or the due date of the exchanger's tax return, whichever comes first.
Depreciation Recapture
Exchanges of like kind property ordinarily do not trigger any depreciation recapture (that is, deductions taken in excess of straight-line depreciation under Section 1250 IRC). When there is an exchange into a property of lesser value, or when the exchange consists partly of cash and property not of a like-kind, consideration must be given to the depreciation recapture provisions of Section 1250 and the higher capital gain tax rates for depreciation recapture.
Direct Deeding
Vested owner deeds directly to the final owner. Doesn't eliminate the duties of the qualified intermediary to acquire and transfer the relinquished property and acquire and transfer the replacement property.
Exchange Equity
The "cash" and other "property" available at time of closing on the sale of the relinquished property.
Exchanging Up
To accomplish a fully tax-deferred exchange, the rule of thumb is "exchange even or up in value; exchange even or up in equity and in debt."
Exchange Period
The replacement property should be received by the taxpayer within the "exchange period," which ends on the earlier of 180 days after the date which the taxpayer transferred the property relinquished, or the due date for the taxpayer's tax return for the taxable year when the transfer of the relinquished property occurs (such as April 15th). The exchange period is 180 days, due to the taxpayer's ability to extend the date of payment.
Equity
The proceeds from the sale of a property.
Gain
The amount obtained for a property minus the property's adjusted basis and transaction costs. No matter what the adjusted basis of a property is, there's no gain until the property is transferred. There are two types of gain: "realized gain" and "recognized gain." Realized gain is the difference between the total consideration (cash and anything else of value) received for a piece of property and the adjusted basis. Realized gain is not taxable until it is recognized. Gain is usually, but not always, recognized in the year which it is realized. If gain is not recognized in the year it is realized, it is said to be deferred. In an exchange under Section 1031, realized gain is recognized in part or in full to the extent that boot is received. (See Boot.) Where only like kind property is received, no gain is recognized at the time of the exchange.
Growth Factor
Interest earned for the duration of the exchange that is payable at the end.
Identification Period
The replacement property must be identified within 45 days of the close of escrow/closing the relinquished property. If the 45th day happens to fall on a weekend or legal holiday, it is not to be extended.
Institutional-grade property
Various types of real estate properties generally owned or financed by tax-exempt institutional investors. Core investments typically include office, retail, industrial and apartments. Specialty investments include hotels, congregate care facilities, land beneath existing improvements, vacant land, mixed-use properties (i.e., a property containing at least two property types) and mobile home parks.
IRS 1031 Tax Code
Internal revenue code section 1031.
Like-Kind Property
Like-kind refers to the type of property being exchanged: any real estate investment for any other type of real estate investment - for example, vacant land can be exchanged for rental property. In most cases your personal residence is not like-kind investment property.
Napkin Rule
You must buy a Replacement Property of equal or greater value to the Relinquished Property in order to completely defer the applicable capital gains tax. If you purchase a property of lesser value, you will be responsible for any tax on the difference. You must also use all the cash proceeds from the sale on your purchase in order to completely defer the applicable capital gains tax. If you do not use all your proceeds on the purchase, you will be responsible for any tax on the difference.
Non-Recourse Loan
A loan where the lending bank is only entitled to repayment from the profits of the project the loan is funding, not from other assets of the borrower.
NNN Triple Lease
A lease that requires the tenant to pay for property taxes, insurance and maintenance in addition to the rent (also referred to as net net net lease or triple net lease).
Passive Income
Income derived from business investments in which the individual is not actively involved, such as a real estate limited partnership.
Qualified Intermediary
A qualified intermediary is a person who enters into a written exchange agreement with you to acquire and transfer the property you give up and to acquire the replacement property and transfer it to you. This agreement must expressly limit your rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by the qualified intermediary. The Intermediary is also known as, QI, Accommodator, Facilitator, Qualified Escrow Holder.
Realized Gain
Gain that is not necessarily taxed. In a successful exchange the gain is realized but not recognized and thus not taxed.
Recognized Gain
Amount of gain which is subject to tax when property is disposed of at a gain or profit in a taxable transfer.
Relinquished Property
Old property that is being sold by the exchanger. (Formally called the down leg property, currently called phase I property.)
Replacement Property
New property being acquired or the target property being brought by exchanger. (Formally called up leg property, currently called phase" property.)
Reversed Exchange
This is the type of exchange in which the Replacement Property is purchased before the sale of the Relinquished Property.
Rules of Identification
The guidelines that must be followed when making a 1031 tax deferred exchange, such as the 3 Property Rule, 200% Percent Rule, and 95% Percent Rule.
Safe Harbor
Term identifying the requirements to protect the exchanger's money and the "qualified intermediary."
Seller
Individual or entity that owns Replacement Property desired by Taxpayer.
Starker Exchange
A term used to describe delayed exchanges. "Starker vs. Commissioner" established the delayed exchange concept. The term "Starker exchange" is used as another way of referring to delayed, deferred or any other non-simultaneous exchange.
Tax-Advantaged
Having other tax benefits that typically result in tax savings.
Taxpayer
Also known as the exchanger. A taxpayer has property and would like to exchange it for new property. While all parties in an exchange are theoretically taxpayers, this term applies to the party who expects to receive tax deferred treatment under Section 1031.
Tax Reform Act of 1984
In the Tax Reform Act of 1984, Congress addressed the IRS' continued displeasure with the Starker decision by amending Section 1031 to allow delayed exchanges; but only if all of the exchange property is identified and acquired within specific deadlines (see Exchange Period). In the Conference Report accompanying the 1984 Act, Congress specifically reaffirmed that a "sale" followed by reinvestment in like-kind property doesn't qualify for tax deferral under Section 1031. To qualify for tax deferral, it is still essential to cautiously structure an exchange to avoid actual or constructive "receipt" of proceeds of sale and to prevent characterization of the transaction as a taxable sale and reinvestment.
Tax Shelter
A technique that allows an investment to be legally exempt from federal, state, and local taxes to varying degrees.
Transaction Costs
Any cash paid by way of commission or other expense in an exchange. Transaction costs are deducted in computing the consideration received.
Tenancy in Common
A fractional or partial ownership interest in a piece of property, rather than owning the entire piece of property.
Three Property Rule
The Exchanger may identify up to 3 properties, without regard to their value.
The 200% Rule
The 1031 Exchanger may identify more than three properties, provided their combined fair market value does not exceed 200% of value of the Relinquished Property.
The 95% Rule
The 1031 Exchanger may identify any number of properties, without regard to their value, provided the Exchanger acquires 95% of the fair market value of the properties identified.
