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200 Percent Rule: Any number of replacement properties can be identified by the taxpayer in an exchange, provided that their combined fair market value does not exceed 200 percent of the combined fair market value of the relinquished property.
95 Percent Rule: Any property received prior to the end of the 45-Day Identification Period will be considered to be properly identified, and if the taxpayer receives at least 95 percent of all replacement property identified, all will be considered to be properly identified.
Accommodator: An accommodator, also known, as Qualified Intermediary or a facilitator is a third party to an IRC Sec. 1031 exchange transaction who acts to facilitate an exchange by disposing of or acquiring property in the exchange on the behalf of the taxpayer.
Adjusted Basis: The adjusted basis is equal to the purchase price plus the capital improvements less the depreciation. It is base price of an asset or security that reflects any deductions taken on or improvements to the asset or security, used to compute the gain or loss when sold. It is a modification of the cost of a capital asset for income tax purposes.
Basis: The basis, also referred to as the cost basis, is the amount assigned to an asset from which the taxpayer determines capital gains or losses. It is an amount attributed to an asset for income tax purposes depending on how the taxpayer acquired the property. Basis is the actual price paid in case of assets that have been purchased. Special rules apply to assets acquired through gift or inheritance, as well as to the value of stock funds held for a period during which earnings are reinvested.
Boot: Boot is any type of Personal Property received in a Real Property transaction that is not like kind, such as cash, mortgage notes, a boat or stock. The Exchanger pays taxes on the boot to the extent of recognized capital gain. In an exchange if any funds are not used in purchasing the replacement property that also will be called boot.
Build-to-suit 1031 exchange: A 1031 exchange where the Qualified Intermediary or EAT holds the title to the replacement property on behalf of the property seller, and during which time improvements are made to the replacement property. Also known as an Improvement exchange.
Buyer: The person/ individual who wants to acquire the exchanger's relinquished property is usually termed the Buyer in a 1031 exchange transaction. In a three- or four-party exchange, the buyer usually has the cash.
Buyer-Accommodator Exchange: In this type of exchange the Buyer acts as accommodator. Exchange occurs after Buyer acquires Replacement Property from Seller. Instead of paying the Seller, the Buyer uses the funds to acquire the Replacement Property and conveys it to the taxpayer in exchange for the Relinquished Property. The historic Starker case was a buyer-accommodator exchange.
Capital Gain: Capital gain is the difference between the sales price of the Relinquished Property less selling expenses and the adjusted basis of the property. It is the profit on the sale of a capital asset. A tax assessed on profits realized from the sale of a capital asset is known as capital gains tax.
Concurrent 1031 exchange: A 1031 exchange where the sale of the relinquished property and the purchase of the replacement property take place simultaneously. It is also known as the Simultaneous Exchange. This type of exchange was more popular before the Starker case.
Constructive Receipt of Cash: When money or property is made available to the taxpayer, set apart for the taxpayer, or credited to the taxpayer's account it is called the CONSTRUCTIVE RECEIPT. It is the receipt of cash by Taxpayer's agent in transaction or "deemed receipt" by Taxpayer as a result of Taxpayer's legal right "to demand cash" under an improperly structured exchange.
Deferral: The tax on an exchange transaction is not paid at the time of the transaction. Rather, it is paid at the time the replacement property is ultimately sold. Deferral is actually accomplished by substituting, or carrying over the basis of the taxpayer's relinquished property to the replacement property making any necessary adjustments for additional consideration paid.
Delayed Exchange: Also known as non-simultaneous, deferred and Starker Exchange, a delayed exchange is when the Replacement Property is received after the transfer of the Relinquished Property. All potential Replacement Properties must be identified within 45 days from the transfer of the Relinquished Property and the Exchanger must receive all Replacement Properties within 180 days or the due date of the Exchanger's tax return, whichever comes first.
Depreciation Recapture: Depreciation is the decline in an asset's value due to wear and tear, aging, obsolescence, and exhaustion, usually taken as an annual tax deduction during ownership. Exchanges of like-kind property ordinarily do not trigger any depreciation recapture (that is, deductions taken in excess of straight-line depreciation under Section 1250 I.R.C.). Where there is an exchange into a property of lower value, or where the exchange consists partly of cash and property not of a like–kind, consideration must be given to the depreciation recapture provisions of Section 1250 and the higher capital gains tax rates for depreciation recapture.
Direct Deeding: Direct Deeding is a practice where either the relinquished property or the replacement property can be deeded directly from seller to buyer without deeding the property to the Qualified Intermediary (QI). It is the transfer of property from the taxpayer directly to the purchaser of relinquished property and to the taxpayer from the seller of replacement property without requiring the Qualified Intermediary to take title by deed.
Exchange: A transaction, or a series of transactions, in which the taxpayer relinquishes property and receives replacement property. It is a transaction in which all or part of the consideration for the purchase of real property is the transfer of property of a like kind.
Exchanger: Another name for the property owner wishing to sell one property and buy another "like kind" replacement property and defer capital gains tax on the proceeds. Also called the Taxpayer or Client is actually the seller of a relinquished property executing a 1031 exchange.
Exchange Accommodation Titleholder (EAT): EAT is the entity that holds title to either the Relinquished Property or the Replacement property in connection with a Reverse Exchange. In most cases, the EAT is affiliated with the Qualified Intermediary handling the reverse exchange.
Exchange period: The period of time in which the replacement property must be acquired and all exchange funds must be exhausted. It is a 180-day time span in which the property exchange has to take place. During this period there is also a 45-day period where the exchanger must identify which "like kind" property will be purchased.
Gain: It is the amount obtained for a property minus the property's adjusted basis and transaction costs. There are two types of gain: “realized gain” and “recognized gain.”
Identification period: The period of time in which the replacement property must be acquired and all exchange funds must be exhausted. The time period beginning on the date the taxpayer transfers the relinquished property and ending at midnight on the 45th day following the date of transfer.
Improvement exchange: A 1031 exchange where the Qualified Intermediary or EAT holds the title to the replacement property on behalf of the property seller, and during which time improvements are made to the replacement property. Also known as a Build-to-suit exchange.
Intermediary: Same as Qualified Intermediary.
Like Kind property: Property that would qualify for a like-kind exchange under IRC Section 1031. Referring to the nature or character of property, rather than the grade, quality, or use; property that is considered exchangeable for income tax purposes. Any real property held for investment can be exchanged for other investment property. It is the replacement property in a 1031 exchange that is similar in classification or characteristics to the relinquished property. Like kind property cannot be a primary residence or a second home and must be for business or investment purposes.
Napkin Test: A simple test developed by well-known attorney Marvin Starr to determine whether there will be Boot in an exchange. As a general rule, the taxpayer who trades up in value, loans ("encumbrances") and equity will not have to recognize any gain.
Net Effective Equity: It is the Taxpayer's gross equity (Market Value less Loans) less all transaction costs incurred in disposition (Relinquished Property) and acquisition (Replacement Property) phases of the exchange. It is similar to Seller’s "net proceeds."
N-N-N Lease (Triple Net Lease): A Triple Net Lease is one in which the tenant pays all the ongoing operating expenses and the landlord receives a net rent. It is the tenant's liability to pay all the property taxes, utilities, insurance premiums, maintenance and repairs of the real estate property. In some cases, the triple net tenant even pays the interest payments on the lessor's mortgage on the property leased.
Partial exchange: When a 1031 exchange also includes receiving cash or excluded (non-like-kind property). In this case, taxes would be incurred on the non-tax deferrable (non-qualifying) portion of the exchange.
Phase I: The phase where the relinquished property is sold. Also called the down-leg phase of a 1031 exchange.
Phase II: The phase where the replacement property is purchased. Also called the up-leg phase of a 1031 exchange.
Qualified Intermediary: A Qualified Intermediary is the company/ individual who acts as the accommodator in the exchange. Also referred to as an accommodator or a facilitator in a 1031 exchange. A qualified intermediary is identified as follows: 1.) Not a related party to the Exchanger, (e.g. agent, attorney, broker, etc.); 2.) Receives a fee; 3.) Acquires the relinquished property from the Exchanger; and 4.) Acquires the replacement property and transfers it to the Exchanger.
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, which is subject to tax when property is disposed of at a gain or profit in a taxable transfer.
Relinquished property (Property Sold): The property given up by the Exchanger to start the 1031 exchange transaction. This is Phase One of the transaction.
Replacement property (Property Bought): The property the Exchanger acquires in a 1031 exchange or Phase Two of the transaction.
Reverse exchange: A reverse exchange allows you to exchange property in reverse order. It is designed to “park” replacement property or relinquished property with an accommodating party until the taxpayer arranges for transfer of relinquished property to a buyer in a simultaneous or deferred exchange.
Safe harbor: A device approved by the IRS which shields the exchanger from receiving sale proceeds; a qualified intermediary is by far the most commonly used safe harbor. These are specifications used to protect the property seller’s money and the Qualified Intermediary in a 1031 exchange.
Section 1031: A provision of the Internal Revenue Code that allows owners of investment property to "exchange" a property for other "like-kind" property and to defer any capital gains into the acquired property. Also called a "1031 Exchange" or a "Starker Exchange."
Seller: In a three- or four-party exchange, the person who owns the replacement property that the taxpayer wants to acquire in the exchange.
Seller-Accommodator Exchange: In this type of exchange the Seller acts as accommodator. The Exchange transaction occurs first; the Seller then transfers Taxpayer's property to Buyer.
Simultaneous Exchange: Also referred to as a concurrent exchange when the Exchanger transfers out of the Relinquished Property and receives the Replacement Property at the same time.
Starker exchange: A name derived from the Starker Court Case in 1979. It is used to describe a delayed or deferred exchange. The first case that challenged exchanges of property received over a period of 2 years.
Tax deferred exchange: A tax-deferred exchange is a method of transaction by which a property owner trades one or more relinquished properties for one or more replacement properties of "like-kind", while deferring the payment of federal income taxes and some state taxes on the transaction. It allows one to reinvest the proceeds from the sale of real estate property held for investment or business purposes (relinquished property) to another like property (replacement property) and defer capital gains tax that would otherwise be due on the first sale. It is the same as 1031 Exchange.
Taxpayer: Taxpayer, also called the exchanger has property and would like to exchange it for new property. While all parties in an exchange are theoretically taxpayers, this term applies to the party who expects to receive tax-deferred treatment under Section 1031.
Tenants In Common (TIC): A tenant in common is a property owned by two or more persons at the same time. The Tenants In Common investors possess undivided interests in the property or designated interests of differing sizes. Each owner retains the right to sell his or her share in the property as he or she sees fit. Upon death, the decedent' s interest passes to his/her heirs named in the will who then become new tenants in common with the surviving tenants in common. As tenants in common you share the income, tax benefits, and appreciation of the property on a pro rata basis depending on your share of the property.
Transaction Costs: Transaction costs are any cash paid by way of commission or other expense in an exchange. Transaction costs are deducted in computing the consideration received.
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.
Triple Net Lease: Same as N-N-N lease.
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