FREE GUIDE

Click HERE for your   Free Investor Guide to Understanding 1031 Exchanges

Terminology

1031 Exchange
A 1031 Tax Deferral 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.

Adjusted Cost Basis
The original basis plus improvement costs minus the depreciation of the property.

Agreement for Transfer
Purchase agreement, sale agreement, earnest money agreement, offer and acceptance, real estate contract or other contract contemplating the purchase or sale of real property.

Boot
To the extent that you do not exchange even or up in value and/or exchange even or up in equity and debt, you 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 - whichever is lower.

Capital Gain
Capital gain is calculated as follows: total selling price of the relinquished property, less exchange expenses, less the relinquished property’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 Internal Revenue Service.

Constructive Receipt
A term that refers to the exchanger having unrestricted control of the equity from the property sold. A constructive receipt will invalidate a tax-deferred exchange.

Contract Exchange
A contract exchange is the tax-deferred exchange of: the buyer’s ownership in a sales contract on real property, for different real property, or for a contract or option on different real property; or the option holder’s exchange of an option to purchase real property, for different real property, or for an option or contract on different real property. Essentially, a contract exchange is an exchange of an open option to purchase, or an open sales contract, rather than an exchange of the underlying real estate itself.

Exchanger
The owner of the investment property looking to make a tax-deferred exchange.

Exchange Period
The 180-day window in which the exchanger has to complete a tax-deferred exchange. The exchange period includes an initial 45-day identification period in which the exchanger must identify which property or properties will be purchased.

Fair Market Value
The likely selling price as defined by the market at a specific point in time.

Forward Delayed Exchange
A type of exchange which occurs when a property is sold (relinquished property) and another property is purchased (replacement property) within 180 days following the sale of the relinquished property.

Identification Period
The time period that begins upon the close-of-escrow of the relinquished property. During this 45-day period, the exchanger must identify the replacement property in order to continue with the section 1031 exchange transaction.

Identification Removal
An identification removal form is used to remove previously identified replacement property(ies) within the identification period of 45 days.

Identification Statement
An identification statement form is used to identify potential replacement property(ies).

Like-Kind Property
Like-kind refers to the type of property being exchanged. You can exchange any real estate investment for any other type of real estate investment. For example, land can be exchanged for an apartment building. In most cases your personal residence is not going to qualify as like-kind property.

Like-Kind Personal Property
Personal property is any property belonging to the exchanger that is not real estate. The "like-kind" rules are more restrictive on personal property exchanges. For example: you can exchange a four- engine airplane for a four-engine airplane but not for a two-engine airplane. You can exchange a painting for a painting, but not for a piece of sculpture, even though both are considered pieces of art.

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.

Original Cost Basis
The purchase price of a property that is being sold; it is used to calculate capital gains or losses for tax purposes.

Qualified Intermediary
Intermediary, QI, accommodator, facilitator, qualified escrow holder – a third party that helps to facilitate the exchange. It is important to use a third-party QI so that you do not jeopardize the exchange.

Real Estate Exchange
Exchange of real property for real property. All types of real property are like-kind for other real property, including vacant land, residential, commercial, and even long-term leases.

Relinquished Property
The original property being sold by the taxpayer when making an exchange.

Replacement Property
The new property being acquired by the taxpayer when making an exchange.

Reverse Exchanges
Type of exchange in which the replacement property is purchased before the sale of the relinquished property.

Tax Advisor
Accountant, CPA, financial advisor, tax attorney.

1031 Tax-Deferred 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, 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.

Tenancy in Common (TIC)
A fractional ownership interest in a piece of property, rather than owning the entire piece of property.

Three Property Rule
The exchanger may identify up to three properties, without regard to their value.

200% Percent Rule
The exchanger may identify more than three properties, provided their combined fair market value does not exceed 200% of value of the Relinquished Property.

95% Percent Rule
The 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.