1031 Glossary of Terms

1031 Buyer Representation
Real Estate Brokerage Company with expertise in §1031 Exchanges. Their main function is to represent the interests of the §1031 buyer rather than to the property broker who has a fiduciary responsibility to the seller.

1031 Exchange
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 is exchanged for property held for investment, trade or business. There are several kinds of §1031 exchange methods used today, including delayed exchanges, simultaneous exchanges, and reverse exchanges.

1031 Tax Deferred Exchange
An exchange where, pursuant to "An Agreement" the taxpayer transfers property held either for productive use in a trade, business or for investment and receives a new property to be held either for productive use in a trade, business or for investment.

721 Exchange
Internal Revenue Code, Section §721 Exchange permits an investor to contribute a property to a partnership. The investor receives interest in the partnership called operating partnership units (OP units). 721 exchanges are often used by real estate investment trusts (REITs), which typically own all or substantially all of their assets through a subsidiary partnership with the REIT acting as general partner.

1991 Revisions
Year when the IRS held a hearing to "clean up" the Tax Reform Act of 1984 and provide uniform terminologies. A main result of this revision was that the IRS eventually had a change of attitude toward Delayed Exchanges by accepting them instead of fighting them.

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, a related party, or an agent of the taxpayer.

Adjusted Basis
The basis of a property adjusted for any capital improvements or depreciation. To calculate the adjusted basis, add the basis (the cost of the property), to the cost of any capital improvements made to the property during the taxpayer's ownership, and subtract the depreciation taken on the property during that specific time period. Once the adjusted basis is known, the gain or loss can be computed.

Appreciation
An increase in an asset’s value.

Asset Allocation
Dividing investments among different kinds of assets, such as stocks, bonds, real estate and cash, to balance the risks of investing. Asset allocation models vary based on an individual’s specific financial goals and situation.

Basis
System of measuring investment in property for tax purposes.
Example: Original cost, plus improvements, minus depreciation taken.

Basis in the Replacement Property
In an exchange, the deferral of the tax on the gain is accomplished by requiring the taxpayer to carryover (substitute) the basis of the relinquished property to the replacement property with suitable adjustments in the event additional consideration is paid.

Bear Market
An extended period of falling value of the overall market, accompanied by widespread pessimism.

Boot
In an exchange of real property, any consideration received other than real property is "boot." The amount of gain recognized is always limited to the gain realized or boot, whichever is the smaller amount. For a transaction to result in no recognized gain, the taxpayer must receive property with an equal or greater market value and debt than the property relinquished, and receive no boot. In exchanges, there are two types of boot: cash boot and mortgage boot. Cash boot is cash or anything else of value received. Mortgage boot is any liabilities assumed or taken subject to in the exchange.

Broker/Dealer
An individual or firm that is in the business of buying and selling securities. Broker/dealers are registered with the Securities and Exchange Commission (SEC).

Bull Market
An extended period of rising value of the overall market.

Buyer
Person who wants to acquire the exchanger's property. For a three- or four-party exchange, the buyer usually has cash.

Capital Appreciation
Increased market value of an asset as measured by share price.

Capital Gain
Difference between the sales price of the Relinquished Property less selling expenses and the adjusted basis of the property.

Class “A” Property
Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high quality standard finishes, state of the art systems, exceptional accessibility, and a definite market presence.

Concurrent Exchange
Also referred to as a simultaneous exchange when the Exchanger transfers out of the Relinquished Property and receives the Replacement Property at the same time.

Constructive Receipt
Control of the cash earnings without real physical possession by the Exchanger or their agent.

Closing
The transfer of title of real property in a real estate transaction.

Deferral
Tax on an exchange transaction is not paid at the time of transaction but at the time the replacement property is sold. Deferral is 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.

Deferred Exchange
term currently used in place of "Non-Simultaneous Exchange" or "Starker Exchange." A type of exchange where the Exchanger utilizes the exchange period.

Delaware Statutory Trust
A separate legal entity created as a trust under Delaware statutory law. The DST owns 100% of the interest in the underlying real property.

Delayed Exchange
Also known as non-simultaneous, deferred, and Starker. A delayed exchange is when the Replacement Property is received following 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
Decline in value of an asset. Property depreciation occurs due to general wear and tear or other property-specific or external factors.

Depreciation Recapture
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 IRC). When there is an exchange into a property of lesser value, or when 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 gain tax rates for depreciation recapture.

Direct Deeding
Vested owner deeds directly to the final owner. Doesn't eliminate the duties of the Qualified Intermediary to acquire and transfer the relinquished property and acquire and transfer the Replacement Property.

Diversification
Similar to asset allocation, diversification is a strategy designed to reduce overall portfolio risk.

Due Diligence
The practice of investigating a potential investment.

Exchange Equity
The "cash" and other "property" available at time of closing on the sale of the relinquished property.

Exchangor
Party wishing to defer tax on gain on the exchange of investment property.

Exchange Period
The replacement property should be received by the taxpayer within the "Exchange Period," which ends on the earlier of 180 days after the date which the taxpayer transferred the property relinquished, or the due date for the taxpayer's tax return for the taxable year when the transfer of the relinquished property occurs (such as April 15th). The exchange period is 180 days, due to the Taxpayer's ability to extend the date of payment.

Gain
The amount obtained for a property minus the property's adjusted basis, and transaction costs. No matter what the adjusted basis of a property is, there's no gain until the property is transferred. There are two types of gain "realized gain" and recognized gain." Realized gain is the difference between the total consideration (cash and anything else of value) received for a piece of property and the adjusted basis. Realized gain is not taxable until it is recognized. Gain is usually, but not always, recognized in the year which it is realized. If gain is not recognized in the year it is realized, it is said to be deferred. In an exchange under Section §1031, realized gain is recognized in part or in full to the extent that boot is received. See Boot. Where only like-kind property is received, no gain is recognized at the time of the exchange.

Growth Factor
Interest earned for the duration of the exchange that is payable at the end.