1031 Exchange - This very simply is 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. ( Back to top )
Adjusted Basis - The original basis plus any improvement costs minus the full depreciation on the property. ( Back to top )
Agreement for Transfer - Purchase agreement, offer and acceptance, sale agreement, earnest money agreement, real estate contract
or other contract contemplating the purchase or sale of real property. ( Back to top )
Boot - This the property the taxpayer receives in the exchange which does not qualify as “like kind" property. Cash proceeds are the
most common form of boot and a boot is subject to taxation. ( Back to top )
Capital Gain - The 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 IRS.
Construction 1031 Exchange - You may even purchase replacement property that is not yet built, provided that the improvements on
the property are completed prior to the expiration of the 180 days (Which can be very difficult). In a Construction 1031 Exchange, the
property is held by a specially formed LLC called the EAT "Exchange Accommodation Taxpayer". A Construction Exchange generally
has greater complexity and fees than a 1031 Exchange. ( Back to top )
Constructive Receipt - This is a term that refers to the 1031 exchanger having unrestricted control of the equity from the property sold
and a Constructive Receipt will invalidate a tax deferred 1031 exchange. ( Back to top )
Contract 1031 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 a 1031 exchange of an open option to purchase, or an open Sales Contract, rather than a 1031 exchange of the underlying real estate itself. ( Back to top )
Cooperation Clause - A clause that is added to the purchase on sales agreement requiring the person who is not the exchanger to use their best efforts to assist the exchanger in consummating a 1031 tax deferred exchange. ( Back to top )
Exchange Accommodation Taxpayer - The Exchange Accommodation Taxpayer "EAT" is a specially formed LLC used during a
Construction Exchange or a Reverse Exchange. ( Back to top )
Exchanger - The actual owner of the investment property looking to make a tax deferred exchange. Unfortunately an exchanger cannot
be an owner that wishes to defer capital gains tax on a second home. See "like kind" property definition. ( Back to top )
Exchange Funds Account - The account established by the qualified intermediary (QI) to hold the exchange funds. ( Back to top )
Exchange Period - A 180 day window in which the exchanger has to complete a tax deferred exchange. During the exchange period
there is a 45 day identification period in which the exchanger must identify which property or properties that will be purchased.
The Fair Market Value - This is likely selling price as defined by the market at a specific point in time. ( Back to top )
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. ( Back to top )
Identification Period - The time period that begins upon the "close of escrow" of the relinquished property. During this 45-day period, the 1031 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 or properties
within the Identification Period of 45 days. ( Back to top )
Identification Statement - An Identification Statement form is used to identify potential replacement property or properties. ( Back to top )
IRS 1031 Tax Code - Internal revenue code section 1031. ( Back to top )
"Like-Kind" Property - The properties involved in a tax deferred exchange must be similar in nature or characteristics. "Like kind"
real estate property is basically any real estate that is NOT your personal residence or NOT a second home. ( Back to top )
The 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 use all the cash proceeds from the sale on your purchase in order to completely defer the applicable capital gains tax. Now if you happen not use all your proceeds on the purchase, you will be responsible for any tax on the difference. ( Back to top )
Original Basis - This is the purchase price of a property and it is used to calculate capital gains or losses for tax purposes.
Personal Property - Any property belonging to the 1031 exchanger that is non real estate related. ( Back to top )
Phase 1 - The process in which the relinquished property is sold and all of the respective paper work for that process is completed.
This process is also known as the “down leg” of the tax deferred exchange process. ( Back to top )
Phase 2 - This is the process in which the replacement property is bought and all the respective paperwork for that process is
completed. This process is also known as the “up leg” of the tax 1031 deferred exchange process. ( Back to top )
Qualified Intermediary - The Intermediary is also known as, QI, Accommodator, Facilitator, Qualified Escrow Holder. A third party that
helps to facilitate the exchange. ( Back to top )
Real Estate Exchange - A type of 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 some long term leases. ( Back to top )
Relinquished Property - The original property being sold by the taxpayer when making a 1031 exchange. ( Back to top )
Replacement Property - Is the new property being acquired by the taxpayer when making a 1031 exchange. ( Back to top )
Reverse Exchanges - This is the type of exchange in which the Replacement Property is purchased before the sale of the
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. ( Back to top )
Settlement Agent - Definitions include: Title agent, closing officer, escrow officer, settlement officer, closing agent, closing attorney, settlement attorney. ( Back to top )
Tax Advisor - Financial Advisor, Accountant, CPA, Tax attorney. ( Back to top )
Taxpayer - Client, investor, or the exchanger. ( Back to top )
Tax Deferred Exchange - The procedure outlined under IRS 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. A 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 the tax deferred 1031 exchange. ( Back to top )
Tenancy In Common (TIC) - 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. ( Back to top )
The 200% Percent 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. ( Back to top )
The 95% Percent 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. ( Back to top )