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1031 exchange Definitions
1031 Exchange Key Terms
1031 Exchange Definitions
Internal Revenue Code, Section 1031, states that neither gain nor loss is recognized if property held for investment or for productive use in a trade or business. There are several types of 1031 exchange methods used today, including delayed exchanges, simultaneous exchanges, and reverse exchanges.
1031 ACCOMMODATOR: A qualified intermediary who agrees to assist the exchanger to affect a tax-deferred exchange. Also described as a facilitator or an intermediary, a qualified intermediary cannot be the taxpayer or a related party, or an agent of the taxpayer.
ACTUAL RECEIPT: Physical possession of proceeds.
ADJUSTED BASIS: Generally speaking in a standard purchase of real property, the adjusted basis is equal to the purchase price plus capital improvements less depreciation. Transactions involving exchanges, gifts, and probates and receiving property from a trust can have an impact on calculating the property's adjusted basis. The taxpayer's C.P.A. or tax advisor is the party to look to for these types of questions.
CAPITAL GAIN: Generally speaking, this is the difference between the sales price of the Relinquished 1031 property less selling expenses and the adjusted basis of the property.
BOOT: To the extent that investors do not exchange even or up in value and/or exchange even or up in equity and debt, they will have received non-qualifying property ('boot") in your exchange. If boot is received, tax is computed on the amount of gain on the sale or the amount of boot received.
CASH BOOT: Any proceeds actually or constructively received by the 1031 exchanger.
CONSTRUCTIVE RECEIPT: Although investors do not have actual possession of the proceeds, they are legally entitled to the proceeds in some manner such as having the money held by an entity considered as their agent or by someone having a fiduciary relationship with them. This creates a taxable event.
DIRECT DEEDING: Transfer of title directly from the 1031 exchanger to Buyer and from the Seller to Exchanger after all necessary exchange documents have been executed.
EXCHANGE AGREEMENT: The written agreement defining the transfer of the relinquished 1031 property, the subsequent receipt of the replacement 1031 property, and the restrictions on the exchange proceeds during the exchange period.
EXCHANGE PERIOD: The period of time in which replacement 1031 property must be received by the 1031 exchanger; ends on the earlier of 180 calendar days after the relinquished 1031 property closing or the due date for the Exchanger's tax return. (If the 180th day falls after the due date of the 1031 exchanger's tax return, an extension may be filed to receive the full 180 day exchange period.)
EXCHANGING UP: To accomplish a fully tax-deferred 1031 exchange, the investor needs to exchange even or up in value and exchange even or up in equity and in debt.
EXCHANGER: Entity or taxpayer performing a 1031 exchange.
IDENTIFICATION PERIOD: A maximum of 45 calendar days from the relinquished 1031 property closing to properly identify potential replacement 1031 property.
LIKE-KIND PROPERTY: Like-kind refers to the type of property being exchanged. Investors can exchange 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, their personal residence is not like-kind investment property.
MORTGAGE BOOT: This occurs when the Exchanger does not acquire debt that is equal to or greater than the debt that was paid off on the relinquished 1031 property sale; this is referred to as "debt relief." This creates a taxable event.
QUALIFIED INTERMEDIARY: The entity who facilitates the exchange, defined as follows:
1. Not a related party (i.e. agent, attorney, broker, etc.)
2. Receives a fee
3. Receives the relinquished 1031 property from the Exchanger and sells to the buyer
4. Purchases the replacement 1031 property from the seller and transfers it to the Exchanger; Asset Preservation, Inc. (API) is a "Qualified Intermediary."
REALIZED GAIN: Refers to a gain that is not necessarily taxed. In a successful exchange, the gain is realized but not recognized and therefore not taxed.
RECOGNIZED GAIN: Refers to the amount of gain that is subject to tax when property is disposed of at a gain or profit in a taxable transfer.
RELINQUISHED 1031 property (Property Sold): The property given up by the Exchanger to start the 1031 exchange transaction. This is Phase One of the transaction.
REPLACEMENT 1031 property (Property Bought): The property the Exchanger acquires in a 1031 exchange or Phase Two of the transaction.
SIMULTANIOUS 1031 exchange: Also referred to as a concurrent exchange when the Exchanger transfers out of the Relinquished 1031 property and receives the Replacement 1031 property at the same time.
STARKER: Name of the taxpayer in U.S. Court of Appeal's case which authorized Delayed Exchanges. The term a "Starker Exchange" is no longer used to describe a Delayed Exchange.
TAX DEFERED EXCHANGE - The procedure outlined under internal revenue code section 1031 involving a series of rules and regulations that must be met in order to take full advantage of deferring capital gains tax on the sale of investment real estate. §1031 tax-deferred exchanges are also commonly known as: Starker exchanges, delayed exchanges, like-kind exchanges, 1031 exchanges, section 1031 exchanges, tax-free exchanges, nontaxable exchanges, real estate exchanges, real property exchanges. Though all of these terms refer to the same thing, the most typical term used today is tax-deferred exchange.
triple net lease: A property lease in which the lessee agrees to pay all expenses that are normally associated with ownership, such as utilities, repairs, insurance and taxes. Also called closed-end lease.
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.
