1031 EXCHANGE GLOSSARY
1031 Exchange
A tax deferral solution in which an investor may sell a property and then purchase a property of equal or greater value within 180 days. Capital Gains taxes are thus deferred, as the IRS does not recognize a loss or gain when using an exchange.
Accommodator
see Qualified Intermediary
Basis
The original cost of a property, including any improvement expenditures, less depreciation deductions.
Boot
Property which the exchanger receives in the 1031 Process which does not qualify as “like-kind” property and thus, is subject to taxation. Boot may also be excess funds which were not used towards the purchase of the replacement property.
Capital Gain
Capital Gain is the taxable amount of the sale, less exchange expenses, less relinquished property’s adjusted basis
Closing
The turning over of title of real property in a property transaction.
Constructive Receipt
Refers to a situation wherein the exchanger is in control of the proceeds resulting from the sale of the relinquished property. The exchange will not qualify in the eyes of the IRS if the exchanger is in “constructive receipt”.
Deferred Exchange
A process by which taxes resulting from capital gain are deferred (not avoided). A 1031 Exchange is a deferred exchange.
Delayed Exchange
see Starker Exchange
Downleg
Also known as Phase 1. The process in which the relinquished property is sold and all required forms and documents are filled out in accordance with IRC regulations.
Exchange Equity
The cash or property available after the closing of the relinquished property.
Upleg
Also known as Phase 2, refers to the process wherein the replacement property is identified and bought and all forms and documents are completed in accordance with IRC regulations.
Exchange Period
Refers to the 180 days an exchanger has to purchase a replacement property from the sale date of the relinquished property.
Exchanger
Taxpayer, Investor. The investor who conducts or intends to conduct a 1031 Exchange.
Fair Market Value
The selling price of a property defined by an appraiser or by the market at a specific point in time.
Financial Advisor or Tax Advisor
A consultant who can advise during tax code procedures.
Identification Period
The 45 day interval the investor has to identify a property he or she intends to purchase as a replacement property. The time period begins with the closing of the relinquished property sale.
Like-kind
Refers to property which is similar in nature or character. The IRS considers all real property as “like-kind”. As far as personal property, IRS demands that the property exchanged be in the same asset class.
Phase 1
see Downleg
Phase 2
see Upleg
Productive Use
Refers to the required status a replacement property must be used for in a 1031 Exchange. The property must be used for income or investment use only.
Qualified Intermediary
Also known as an accommodator, a QI is in charge of facilitating the exchange process. The QI is required by IRC to hold all proceeds from the sale of the relinquished property until the purchase of a replacement property. IRC expressly disqualifies a person who has acted as the taxpayer's employee, attorney, accountant, investment banker, broker, or real estate agent within the past two years to be the QI in a 1031 Exchange.
Relinquished Property
The original property sold by the investor during the downleg of an exchange.
Replacement Property
The property identified and eventually purchased by the investor within a 1031 Exchange. The replacement property must be identified within 45 days and purchased within 180 days.
Safe Harbor
According to IRC, the proceeds from the sale of the relinquished property must go to a safe harbor to ensure that the investor does not have control over the proceeds. The most commonly used safe harbor is a Qualified Intermediary.
Starker Exchange
or Delayed Exchange. A non simultaneous exchange in which the investor sells and purchases property within the 180 day interval. The exchange was named after an investor, Starker, challenged and won a case against the IRS.
Tenancy-In-Common
or TIC, a fractional ownership of the replacement property of the Exchange. Tenancy-In-Common is generally considered by investors who are looking for less active management of a property.
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