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 exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.
ACCOMMODATOR - An unrelated party who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Exchanger’s relinquished property and the acquisition of the Exchanger’s replacement property. The Accommodator has no economic interest except for any compensation (exchange fee) it may receive for acting as an Accommodator in facilitating the exchange as defined in Section 1031 of the Internal Revenue Code. The Accommodator is technically referred to as the Qualified Intermediary (QI), but is also known as the Accommodator, Facilitator, or Straw Man.
ACCOMMODATION TITLEHOLDER (AT) - Is used to complete a reverse or improvement exchange. This term and the application of its use was defined by the Internal Revenue Service when they issued safe-harbor guidance for reverse and construction exchange transactions in Revenue Procedure 2000-37. In a reverse exchange, the AT holds legal title to either the relinquished or the replacement property until the relinquished property can be sold. In a construction exchange, the AT holds legal title to the replacement property while improvements are being constructed and then conveys the improved property to the exchanger within the 180-day exchange period. Accommodation Titleholders are also referred to as an AT, and Exchange Accommodation Titleholder (EAT).
ADJUSTED COST BASIS – The adjusted tax basis is typically the initial amount paid for the property, plus any capital improvements, less depreciation taken during ownership and any prior deferred gain.
AGREEMENT OF SALE - The written agreement signed between buyer and seller for either the relinquished or replacement property. Also known as Purchase and Sale Agreement, Contract of Sale and many other variations.
BASIS - The basis is usually the original cost of a property.
BOOT - Boot is the taxable proceeds from a 1031 exchange transaction, which are not matched with other like-kind property. Examples of boot are cash, notes, personal property (furniture, equipment, etc.) and non-like-kind property (inventory).
CAPITAL GAIN OR LOSS - The difference between the selling price of a property or asset and its Adjusted Cost Basis.
CAPITAL GAIN TAX - Tax levied by Federal and state governments on investments that are held for one year or more. Investments may include real estate, stocks, bonds, collectibles and tangible depreciable personal property.
CLOSING AGENT – The person responsible for preparing the settlement statement, obtaining signatures at closing and disbursing the funds. Depending on the state where the settlement is taking place the closing agent may be a settlement officer of the title company or an attorney representing the buyer or seller. Sometimes, based on the geographical region, they may be referred to as an escrow officer or agent.
CLOSING COSTS – Closing costs are typical settlement expenses which may include, but are not limited to, real estate commissions, realty transfer fees, legal fees associated with the sale/acquisition, document preparation, title company fees, survey fees, termite certification fee, recording fees and the 1031 exchange fees of a qualified intermediary.
CONSTRUCTION EXCHANGE - A tax-deferred, like-kind exchange whereby the Qualified Intermediary and/or Accommodation Titleholder (AT) acquires title and holds title to the replacement property on behalf of Exchanger, during which time new or additional structures or improvements are constructed or installed on or within the replacement property. Also known as a Build-To-Suit Exchange or Improvement Exchange..
CONSTRUCTIVE RECEIPT - Exercising control over your exchange funds or other property. Control over your exchange funds includes having money or property from the exchange credited to your bank account or property or funds reserved for you. Being in constructive receipt of exchange funds or property may result in the disallowance of the tax-deferred, like-kind exchange transaction, thereby creating a taxable sale.
COOPERATION CLAUSE - Language to be included in the Purchase and Sale Contracts for both relinquished and replacement property that indicates and discloses that the transaction is part of an intended tax-deferred, like-kind exchange transaction and requires that all parties cooperate in completing said exchange. (See our Forms section for sample cooperation clause language.)
DEALER - A person who holds property primarily for sale to customers in the ordinary course of trade or business.
DEPRECIATION – Depreciation is the annual deduction allowed by the Internal Revenue Service to recover the cost or other basis of business or investment property with a useful life of more than one year.
DEPRECIATION RECAPTURE - Depreciation recapture takes place when a business use or investment property is sold. Depreciation taken during ownership is recaptured at the time of sale and must be paid back at 25%.
DIRECT DEEDING – Title to property passes directly from Exchanger to Buyer and/or from Seller to Exchanger without passing through qualified intermediary.
EQUITY - Equity is the difference between the fair market value and the existing liabilities (debt) against the property.
EXCHANGE AGREEMENT - A written agreement between the Qualified Intermediary and Exchanger setting forth the Exchanger’s intent to exchange relinquished property for replacement property, as well as the terms, conditions and responsibilities of each party pursuant to the tax-deferred, like-kind exchange transaction.
EXCHANGER - The Exchanger is you, the taxpayer, (whether an individual or entity) who is electing to defer the capital gains through a 1031 exchange.
EXCHANGE PERIOD - The period of time during which the Exchanger must complete the acquisition of the replacement property(ies) in his or her tax-deferred, like-kind exchange transaction. The exchange period is 180 calendar days from the transfer of the Exchanger’s first relinquished property, or the due date (including extensions) of the Exchanger’s income tax return for the year in which the tax-deferred, like-kind exchange transaction took place, whichever is earlier, and is not extended due to holidays or weekends.
FAIR MARKET VALUE (FMV) – An evaluation of how much a property should be expected to bring when offered in the open market for sale.
GAIN - The gain is the amount by which the sales price exceeds the adjusted tax basis.
IDENTIFICATION PERIOD - The period of time during which the Exchanger must identify potential replacement properties in his or her tax-deferred, like-kind exchange. The period is 45 calendar days from the transfer of the Exchanger’s relinquished property and is not extended due to holidays or weekends.
LEGAL ADVISOR - As in any real estate transaction, competent legal advice should be sought, when necessary. The QI is not permitted to provide legal advice and will recommend you seek the advice of a competent legal advisor. If you are contemplating a reverse or construction 1031 exchange, an attorney is required to prepare some of the necessary documentation.
MORTGAGE BOOT RELIEF - When you assume debt on your replacement property that is less than the debt on your relinquished property, you receive mortgage boot or mortgage relief. Generally speaking, mortgage boot received triggers the recognition of gain and is taxable, unless offset by cash boot added or given up in the exchange. (See Boot.)
NET SALES PRICE - Net Sales Price is the contract sales price less routine transaction expenses such as real estate commission, realty transfer taxes or stamps, settlement/closing fees and 1031 exchange fees.
PARTIAL EXCHANGE - An exchange that entails receiving cash, excluded property and/or non-like-kind property and/or any net reduction in debt (mortgage relief) on the replacement property, as well as an exchange of qualified, like-kind property. In the case of a partial exchange, tax liability would be incurred on the non-qualifying portion and capital gain deferred on the qualifying portion under Internal Revenue Code Section 1031.
QUALIFIED ESCROW ACCOUNT (QEA) - An escrow account, wherein the Escrow Agent is not the Exchanger or a disqualified person and that limits the Exchanger’s rights to receive, pledge, borrow or otherwise obtain the benefits of the tax-deferred, like-kind exchange cash balance and/or other assets from the sale of the relinquished property in compliance with the Treasury Regulations. The Qualified Escrow Account also ensures that the Exchangor’s exchange funds and/or assets are held as fiduciary funds and are therefore protected against claims from potential creditors of the Qualified Intermediary.
QUALIFIED EXCHANGE ACCOMMODATION AGREEMENT (QEAA) - The actual contract or agreement between the Exchanger and the Accommodator Titleholder (AT) that outlines the terms for parking property pursuant to Revenue Procedure 2000-37.
QUALIFIED INTERMEDIARY - The use of a qualified intermediary (QI) is one of the four safe harbors included in Section 1031. The role of the QI is to act as a middleman in both the sale and purchase transactions. The QI is an independent party that acquires and conveys both properties and receives, holds and controls the sale proceeds. The use of a QI provides many advantages, such as the right to direct deed, protection against imputation of agency, and the safe harbor regulations relating to the security of your exchange funds. The QI prepares all necessary documentation, keeps you aware of time deadlines and is available to answer your questions throughout the exchange period. Also known as an Accommodator or Facilitator.
QUALIFIED USE - An Exchanger must intend to use the property in their trade or business, to hold the property for investment or to hold the property for income production in order to satisfy the qualified use test.
REAL ESTATE PROFESSIONAL - The real estate professional should be able to recognize exchange opportunities and make their clients aware of this tax strategy for investment real estate. The role of the real estate professional is the same as in any other real estate transaction. The real estate professional can be very helpful in assisting you identify suitable replacement properties.
REALIZED GAIN - The difference between the total consideration received for a property and the adjusted tax basis.
RECOGNIZED GAIN - The portion of the realized gain, which is taxable (boot).
RELATED PARTY - Individuals and/or business entities determined by Section 267(b) of the Internal Revenue Code as having a special connection to the taxpayer/exchanger. A transaction between a related party and an exchanger may be restricted or prohibited in a 1031 exchange. Related parties include family members (spouses, children, siblings, parents or grandparents, but not aunts, uncles, cousins or ex-spouses) and a corporation in which you have more than a 50% ownership; or a partnership or two partnerships in which you directly or indirectly own more than a 50% share of the capital or profits.
RELINQUISHED PROPERTY - This is the property(ies) you are selling/exchanging.
REPLACEMENT PROPERTY - This is the property(ies) you wish to purchase to complete your exchange.
REVERSE CONSTRUCTION EXCHANGE - The Accommodation Titleholder (AT) can make improvements to the replacement property before transferring it to the taxpayer as part of a Reverse Exchange.
REVERSE EXCHANGE - A tax-deferred, like-kind exchange transaction whereby the replacement property is acquired first and the disposition of the relinquished property occurs at a later date.
TAX ADVISOR - The tax advisor, who is usually familiar with your tax situation, can help you identify short and long term investment goals and determine whether or not a 1031 exchange can help achieve those goals. Additionally, the tax advisor should also assist you in determining the adjusted tax basis of the property being sold and whether or not the exchange should be contemplated. The tax advisor can help you determine how much should be reinvested and the amount of the replacement property mortgage. The QI is not permitted to give tax advice and will always recommend you seek the advice of a competent tax advisor.
TAX DEFERRED EXCHANGE - The sale or disposition of real estate or personal property (relinquished property) and the acquisition of investment real estate (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.