Glossary of 1031 Exchange Terms

1031 Exchange

The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Accelerated Cost Recovery System (ACRS)

A depreciation method used for most property placed into service from 1981 to 1986. This method allowed property to be depreciated at a faster rate than had been allowed previously. The modified accelerated cost recovery system (MACRS) replaced ACRS for assets placed into service after 1986.

Accelerated Depreciation

A depreciation method that allows you to deduct a greater portion of the cost of depreciable property in the first years after the property is placed in service, rather than spreading the cost evenly over the life of the asset, as with the straight-line depreciation method.

Accommodator

An unrelated party (TransUnion Exchange Corporation) who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Exchangor’s relinquished property and the acquisition of the Exchangor’s replacement property. The Accommodator has no economic interest except for any compensation (exchange fee) it may receive for acting as an Accommodator in facilitating the exchange as defined in Section 1031 of the Internal Revenue Code. The Accommodator is technically referred to as the Qualified Intermediary, but is also known as the Accommodator, Facilitator or Intermediary.

Actual Receipt

Direct access to your exchange funds or other property. Receiving exchange funds during the exchange period will disqualify your exchange. (See Constructive Receipt.)

Adjusted Cost Basis

The amount you use to determine your capital gain or loss from a sale or disposition of property. To determine the adjusted cost basis for your property, you must start with the original purchase cost. You then add your purchasing expenses, your cost of capital improvements and principal payments of special assessments (sewer and streets) to the property, and then subtract depreciation you have taken or were allowed to take, any casualty losses taken and/or any demolition losses taken.

After-Tax Return

The return from an investment after tax liabilities have been factored in.

Agent

An entity that acts on behalf of the taxpayer. A Qualified Intermediary cannot be your agent at the time of or during a tax-deferred, like-kind exchange. For 1031 Exchange purposes, an agent includes your employee, attorney, accountant or investment banker, or real estate agent or broker within the two-year period prior to the transfer of your first relinquished property. An agency relationship does not exist with entities that offer Section 1031 Exchanges services or routine title, escrow, trust or financial services. (See Related Party.)

Alternative Minimum Tax

A method of calculating income tax that does not allow certain deductions, credits, and exclusions. The Alternative Minimum Tax was devised to ensure that individuals, trusts, and estates that benefit from tax preferences do not avoid paying any federal income taxes.

Asset

Anything owned that has monetary value.

Asset Allocation

Repositioning assets within a portfolio to maximize a return for a specific level of risk.

Asset Class

A category of investments that contain similar characteristics.

Balancing the Exchange

A balanced exchange ensures that the taxpayer defers 100% of his or her taxes on capital gain and depreciation recapture. To achieve a balanced exchange 1) acquire a replacement property that is equal to or greater than the relinquished property; 2) reinvest all of the net equity from the relinquished property in the replacement property; and 3) assume debt on the replacement property that is equal to or greater than the debt on the replacement property or contribute cash to make up the deficiency. ( See Partial Tax Deferment; Boot and Mortgage Boot/Relief.)

Basis

The original purchase price or cost of your property plus any out-of-pocket expenses, such as brokerage commissions, escrow costs, title insurance premiums, sales tax (if personal property) and other closing costs directly related to the acquisition.

Beneficiary

An individual, company, organization, or other entity named in a trust, life insurance policy, annuity, will or other agreement who receives a financial benefit upon the death of the principal. A beneficiary can be an individual, company, organization, etc.

Bond

Evidence of debt in which the issuer promises to pay the bondholders a specified amount of interest and to repay the principal at maturity. Bonds are usually issued in multiples of $1,000.

Boot

Non-like–kind property (cash or other property) given by one party to another party in a tax-deferred, like-kind exchange that is taxable. For instance, if you trade in a delivery truck on a new model, the cash you pay in addition to your old truck is boot. Boot received may be offset by boot given. (See also Mortgage Boot.)

Build-To-Suit Exchange

A tax-deferred, like-kind exchange whereby the Qualified Intermediary and/or Exchange Accommodation Titleholder acquires title and holds title to the replacement property on behalf of the Exchangor, during which time structures or improvements are constructed or installed on or within the replacement property. Also known as an Improvement Exchange.

Business Assets

Real property, tangible depreciable property, intangible property and other types of property contained or used in a business. Exchanging one business for another business is not permitted under Internal Revenue Code Section 1031. However, taxpayers may exchange business assets on an asset-by-asset basis, usually as part of a Mixed-Property (Multi-Asset) Exchange.

Capital Gain or Loss

The difference between the selling price of a property or asset and its Adjusted Cost Basis.

Capital Gain Tax

Tax levied by Federal and state governments on investments that are held for one year or more. Investments may include real estate, stocks, bonds, collectibles and tangible depreciable personal property. (See Income Tax.)

Capital Improvements

For land or buildings, improvements (also known as capital improvements) are the expenses of permanently upgrading your property rather than maintaining or repairing it. Instead of taking a deduction for the cost of improvements in the year paid, you add the cost of the improvements to the basis of the property. If the property you improved is a building that is being depreciated, you must depreciate the improvements over the same useful life as the building.

Capitalization Rate

The rate of return an investor wants to achieve on real property. The capitalization rate can provide for the return of the investment and the return on the investment (profit). To obtain a property’s capitalization rate, divide the net operating income of a property by its value. To determine a property’s value, divide the property’s net operating income by the desired capitalization rate. In the Income-Capitalization Method of real property appraisal, a capitalization rate is used to appraise a property’s value. The Income-Capitalization Method of appraisal is used to value investment property, such as apartment buildings, commercial office buildings and retail malls. (See Net Operating Income.)

Cash Equivalents

Short-term investments, such as U.S. Treasury securities, certificates of deposit, and money market fund shares, that can easily be liquidated into cash.

Charitable Lead Trust

A trust established for the benefit of a charitable organization under which the charitable organization receives income from an asset for a set number of years or for the trustor’s lifetime. Upon the termination of the trust, the asset reverts to the trustor or to his or her designated heirs. This type of trust can reduce estate taxes and allows the trustor’s heirs to retain control of the assets.

Charitable Remainder Trust

A trust established for the benefit of a charitable organization under which the trustor receives income from an asset for a set number of years or for the trustor’s lifetime. Upon the termination of the trust, the asset reverts to the charitable organization. The trustor receives a charitable contribution deduction in the year in which the trust is established, and the assets placed in the trust are exempt from capital gain tax.

Collectibles

Personal property, such as baseball cards, coins, stamps, works of art and memorabilia, that is held for investment. Collectibles are exchangeable under Internal Revenue Code Section 1031.

Community Property

All property acquired by a husband and wife during their marriage. Each spouse has a right to an equal interest in the property. Gifts and inheritances received by an individual spouse during the marriage are treated as separate property. Property acquired by the spouse prior to marriage, property acquired with separate property or rents or profits generated from separate property are treated as separate property. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states.

Concurrent Exchange

A tax-deferred, like-kind exchange transaction whereby the disposition of the relinquished property and the acquisition of the replacement property close or transfer at the same time. A Concurrent Exchange is also referred to as a Simultaneous Exchange.

Condominium

A form of real estate ownership, usually residential property, in which the owners own their proportionate share of a fee interest, as well as an undivided proportionate share of all common areas.

Constructive Receipt

Exercising control over your exchange funds or other property. Control over your exchange funds includes having money or property from the exchange credited to your bank account or property or funds reserved for you. Being in constructive receipt of exchange funds or property may result in the disallowance of the tax-deferred, like-kind exchange transaction, thereby creating a taxable sale. (See Actual Receipt.)

Cooperation Clause

Language to be included in the Purchase and Sale Contracts for both relinquished and replacement property that indicates and discloses that the transaction is part of an intended tax-deferred, like-kind exchange transaction and requires that all parties cooperate in completing said exchange. (See our Forms section for sample cooperation clause language.)

Cooperatives

A form of real estate ownership, usually residential property, in which individual owners hold shares of stock in a corporation. Each owner leases property from the corporation under a proprietary lease.

Corporation

A separate entity created by law. Investors in the corporation hold shares of stock. The corporation benefits from any profits generated and is responsible for any losses received. Shareholders may receive dividends on stock and incur any appreciation or depreciation on the sale of their shares of stock. Shareholders are not liable for any debts incurred by the corporation. Creditors can attach a shareholder’s shares in the corporation.

Deduction

An amount that can be subtracted from gross income, from a gross estate, or from a gift, lowering the amount on which tax is assessed.

Deferred Exchange

The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Delayed Exchange

A tax-deferred, like-kind exchange where there is a delay or period of time between the close and transfer of the Exchangor’s relinquished property and replacement property.

Depreciable Property

Property with a useful life of more than one year that is held for investment or used in your trade or business. You spread the cost of the asset over its estimated useful life rather than deducting the entire cost in the year that you placed the asset in service. (See Depreciation Recapture for more information regarding the sale or disposition of assets that have been depreciated.)

Depreciation

Periodic wearing away of property over the property’s economic life. The I.R.S. requires investors and business owners to take a tax deduction on the amount of a property’s depreciation. The practice of amortizing or spreading the cost of depreciable property over a specified period of time, usually its estimated depreciable life. To put it another way, you are allowed a deduction on your income tax return for the wearing away and expensing over time of property or assets, such as aircraft, vehicles, livestock and buildings. A depreciable asset is a capital expenditure in depreciable property used in a trade or business or held for the production of income and has a definite useful life of more than one year. Non-depreciable property includes vacant land. For assets that have an expected useful life of more than one year, you spread the cost of the asset over its estimated useful life rather than deducting the entire cost in the year you place the asset in service. The tax code (law) specifies the depreciation period for specific types of assets.

Depreciation Recapture

The amount of gain resulting from the disposition of property that represents the recovery of depreciation expense that has been previously deducted on the Taxpayer’s (Exchangor’s) income tax returns.

Direct Deeding

A practice authorized by Treasury Revenue Ruling 90-34 whereby either the relinquished property or the replacement property can be deeded directly from seller to buyer without deeding the property to the Qualified Intermediary. (See Sequential Deeding for industry practices prior to Treasury Revenue Ruling 90-34.)

Disposition

The sale or other disposal of property that causes a gain or a loss including like-kind exchanges and involuntary conversions.

Dividend

A pro-rata portion of earnings distributed in cash by a contribution to its stockholders. In preferred stock, dividends are usually fixed; with common shares, dividends may vary with the performance of the company.

EAT

Acronym for Exchange Accommodation Titleholder. (See Exchange Accommodation Titleholder.)

Equity

The value of a person’s ownership in real property or securities; the market value of a property or business, less any claims or liens on it.

Exchange

The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Exchange Accommodation Titleholder ("EAT")

An unrelated party (TransUnion Reverse Exchange Corporation) that holds the Qualified Indicia of Ownership (customarily the title) of either the replacement or relinquished property in order to facilitate a reverse and/or build-to-suit tax-deferred, like-kind exchange transaction pursuant to Revenue Procedure 2000-37.

Exchange Agreement

A written agreement between the Qualified Intermediary and Exchangor setting forth the Exchangor’s intent to exchange relinquished property for replacement property, as well as the terms, conditions and responsibilities of each party pursuant to the tax-deferred, like-kind exchange transaction.

Exchange Period

The period of time during which the Exchangor must complete the acquisition of the replacement property(ies) in his or her tax-deferred, like-kind exchange transaction. The exchange period is 180 calendar days from the transfer of the Exchangor’s first relinquished property, or the due date (including extensions) of the Exchangor’s income tax return for the year in which the tax-deferred, like-kind exchange transaction took place, whichever is earlier, and is not extended due to holidays or weekends.

Exchangor

The taxpayer who is completing the tax-deferred, like-kind exchange transaction. An Exchangor may be an individual, partnership, LLC, corporation, institution or business.

Excluded Property

The rules for like-kind exchanges do not apply to property held for personal use (such as homes, boats or cars); cash; stock in trade or other property held primarily for sale (such as inventories, raw materials and real estate held by dealers); stocks, bonds, notes or other securities or evidences of indebtedness (such as accounts receivable); partnership interests; certificates of trust or beneficial interest; chooses in action.

Fair Market Value

The price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.

Fixed Income

Income from investments, such as CDs, Social Security benefits, pension benefits, some annuities, or most bonds, that is the same every month.

Fractional Interest

An undivided fractional interest or partial interest in property. (See also Tenancy-In-Common Interest.)

Going Concern Value

Additional value that attaches to property because the property is an integral part of an ongoing business activity. It includes value based on the ability of a business to continue to function and generate business even though there is a change in ownership.

Goodwill

The value of a business or trade based on continued customer patronage due to its name, reputation or any other factor. The goodwill of a business is not exchangeable under Internal Revenue Code Section 1031.

Gross Multiplier

A variation on the Income-Capitalization Method of appraising property. The Gross Multiplier approach is a way to obtain a fast, rough estimate of a property’s value. In this approach, a monthly or annual number is multiplied by a property’s gross income to obtain the property’s value. Dividing the sale price of a similar property by its gross income provides its gross multiplier.

Identification Period

The period of time during which the Exchangor must identify potential replacement properties in his or her tax-deferred, like-kind exchange. The period is 45 calendar days from the transfer of the Exchangor’s relinquished property and is not extended due to holidays or weekends.

Improvement Exchange

A tax-deferred, like-kind exchange whereby the Qualified Intermediary and/or Exchange Accommodation Titleholder acquires title and holds title to the replacement property on behalf of Exchangor, during which time new or additional structures or improvements are constructed or installed on or within the replacement property. Also known as a Build-To-Suit Exchange.

Improvements

For land or buildings, improvements (also known as capital improvements) are the expenses of permanently upgrading your property rather than maintaining or repairing it. Instead of taking a deduction for the cost of improvements in the year paid, you add the cost of the improvements to the basis of the property. If the property you improved is a building that is being depreciated, you must depreciate the improvements over the same useful life as the building.

Income Tax

Taxes owed to the federal government based upon the taxpayer’s income, including income derived from a property sale. In a 1031 Exchange, income generated when property is transferred is not immediately taxed. The income tax is deferred until a new taxable event occurs.

Intangible Personal Property

Property that does not have value itself, but represents something else. Trademarks, patents and franchises are examples of intangible property. Aircraft, business furniture and equipment are examples of tangible personal property.

Intermediary

An unrelated party (TransUnion Exchange Corporation) who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Exchangor’s relinquished property and the acquisition of the Exchangor’s replacement property. The Intermediary has no economic interest except for any compensation (exchange fee) it may receive for acting as an Intermediary in facilitating the exchange as defined in Section 1031 of the Internal Revenue Code. The Intermediary is technically referred to as the Qualified Intermediary, but is also known as the Accommodator, Facilitator or Intermediary.

INTERNAL REVENUE CODE §1031

Section 1031 of the Internal Revenue Code allows an Exchangor to defer his or her capital gain tax and depreciation recapture tax when he or she exchanges relinquished property for like-kind or like-class replacement property.

Irrevocable Trust

A trust that may not be modified or terminated by the trustor after its creation.

I.R.S.

Internal Revenue Service

Joint Tenancy

Two or more individuals who own an undivided equal interest in a piece of property. Four unities are required to create a joint tenancy:

  1. Time–all joint tenants must obtain their interest at one time;
  2. Title–all must obtain their interest by the same document;
  3. Interest–each joint tenant has an equal share in ownership;
  4. Possession–each joint tenant has an equal right of possession. If one of the joint tenants dies, his or her interest passes automatically to the surviving party or parties. No inheritance taxes or probate proceedings are required. No joint tenant can sell his or her ownership interest without terminating the joint tenancy.

Like-Class and Like-Kind Personal Property

Refers to the nature or character of the property and not to its grade or quality. Personal property listed or contained within the same general asset classification or product classification ("SIC Code") will be considered to be of like-class and therefore like-kind.

Like-Kind Exchange

The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Like-Kind Property

Property that is exchangeable with another property. Refers to the nature or character of the property and not to its grade or quality.

Limited Liability Company (LLC)

Members of Limited Liability Companies enjoy the limited liability offered by corporations and the minimum requirements of an S corporation. Limited Liability Companies typically contain two or more members and must file articles of organization with the secretary of state, although single-member LLCs are allowed in certain states.

Limited Partnership

Investors who pool their money to develop or purchase income-producing properties. Income from these properties is distributed as dividend payments. In a limited partnership, each limited partner’s liability is limited to the amount of his or her investment. A limited partner only contributes money and is not actively involved in the business. A limited partnership must have one general partner, who is personally liable for all debts.

Living Trusts

A trust created by an individual or individuals, often a husband and wife, during his or her lifetime. Often these individuals hold property as joint trustees for their benefit. If one spouse dies, the surviving spouse would hold title to the property as a trustee. When the surviving spouse dies, the property would pass to the beneficiaries of the trust. Holding property in a living trust allows the heirs to avoid probate and inheritance taxes.

Mixed Property (Multi-Asset) Exchange

An exchange that contains different types of properties, such as depreciable tangible personal property, real property, and intangible personal property. In a Mixed Property Exchange, relinquished properties are segmented in like-kind groups and matched with corresponding like-kind groups of replacement properties.

Modified Accelerated Cost Recovery System (MACRS)

The depreciation method generally used since 1986 for writing off the value of depreciable property, other than real estate, over time. MACRS allows you to write off the cost of assets faster than the straight-line depreciation method.

Mortgage Boot/Relief

When you assume debt on your replacement property that is less than the debt on your relinquished property, you receive mortgage boot or mortgage relief. Generally speaking, mortgage boot received triggers the recognition of gain and is taxable, unless offset by cash boot added or given up in the exchange. (See Boot.)

Multiple Property Exchange

Disposition and/or acquisition of more than one property in a Section 1031 Exchange.

Napkin Test

A simple exercise to determine the potential for exposing taxable assets or “boot” in an exchange. The Napkin Test compares the value, equity and mortgage of the relinquished and replacement properties. By going across or up in value, equity, and mortgage there is no taxable boot in the exchange.

The calculations are based off the following: If when subtracting the relinquished property value from the replacement property value a zero or positive amount is given, then there is no taxable boot. If a negative amount is given, then taxes are paid on that amount.

Net Operating Income

A property’s gross income (scheduled rents and 100% vacancy factor) less its total annual expenses (including management costs, utilities, services, repairs, a vacancy factor and a credit loss factor) plus any additional other income (vending machines, coin laundry operations, etc.). Principal and interest payments on the mortgage and tax liability are not included.

Ordinary Income Tax

Tax levied by Federal and State governments on a taxpayer’s adjusted gross income. Investments that are held for less than one year are taxed at ordinary income tax rates. (See Capital Gain Tax.)

Parking Arrangement

A process or procedure whereby either the Exchangor’s relinquished property or replacement property is acquired by an Exchange Accommodation Titleholder ("EAT") in order to facilitate a reverse and/or build-to-suit tax-deferred, like-kind exchange transaction pursuant to Treasury Revenue Ruling 2000-37.

Partial Exchange

An exchange that entails receiving cash, excluded property and/or non-like-kind property and/or any net reduction in debt (mortgage relief) on the replacement property, as well as an exchange of qualified, like-kind property. In the case of a partial exchange, tax liability would be incurred on the non-qualifying portion and capital gain deferred on the qualifying portion under Internal Revenue Code Section 1031.

Partial Tax Deferment

A tax that is owed by the taxpayer, of which part of the tax is paid to the IRS when taxes are due. The remaining tax is postponed to a time when a new taxable event occurs.

Partnership (tenancy in partnership)

An association of two or more persons who engage in a business for profit. A partnership is created by an agreement, which does not have to be in writing. However, for the partnership to hold title in a partnership name, the partnership agreement must be signed, acknowledged and recorded. Tenancy in partnership allows any number of partners to have equal or unequal interest in property in relation to their interests in the partnership. Profits and liabilities are passed through to the members. In a limited partnership, each limited partner’s liability is limited to the amount of his or her investment. A limited partner only contributes money and is not actively involved in the business. A limited partnership must have one general partner who is personally liable for all debts. Partnership entities can complete exchanges. Partnership interests are not exchangeable. Difficulties sometimes occur in 1031 Exchanges when some partners want to enter into an exchange while others want to sell.

Personal Property Exchange

A tax-deferred transfer of personal property (relinquished property) for other personal property (replacement property) that are of like-kind or like-class to each other.

Principal Residence Exemption

Exclusion from capital gain tax on the sale of principal residence of $250,000 for individual taxpayers and $500,000 for couples, filing jointly, under Internal Revenue Code Section 121. Property must have been the principal residence of the taxpayer(s) 24 months out of the last 60 months. In the case of a dual-use property, such as a ranch, retail store, duplex or triplex, the taxpayer can defer taxes on the portion of the property used for business or investment under Internal Revenue Code Section 1031 and exclude capital gain on the portion used as the primary residence under Section 121.

Qualified Escrow Account

An escrow account, wherein the Escrow Agent (Diversified Title Insurance Company) is not the Exchangor or a disqualified person and that limits the Exchangor’s rights to receive, pledge, borrow or otherwise obtain the benefits of the tax-deferred, like-kind exchange cash balance and/or other assets from the sale of the relinquished property in compliance with the Treasury Regulations. The Qualified Escrow Account also ensures that the Exchangor’s exchange funds and/or assets are held as fiduciary funds and are therefore protected against claims from potential creditors of the Qualified Intermediary.

Qualified Exchange Accommodation Arrangement

The contractual arrangement between the Exchangor and the Exchange Accommodator Titleholder whereby the EAT holds a parked property pursuant to Revenue Procedure 2000-37.

Qualified Exchange Accommodation Agreement

The actual contract or agreement between the Exchangor and the Exchange Accommodator Titleholder that outlines the terms for parking property pursuant to Revenue Procedure 2000-37.

Qualified Intermediary

An unrelated party (TransUnion Exchange Corporation) who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Exchangor’s relinquished property and the acquisition of the Exchangor’s replacement property. The Qualified Intermediary has no economic interest except for any compensation (exchange fee) it may receive for facilitating the exchange as defined in Section 1031 of the Internal Revenue Code. The Qualified Intermediary is the correct technical reference pursuant to Treasury Regulations, but the Qualified Intermediary is also known as the Accommodator, Facilitator or Intermediary.

Qualified Trust Account

A trust, wherein the trustee is not the Exchangor or a disqualified person and that limits the Exchangor’s rights to receive, pledge, borrow or otherwise obtain the benefits of the tax-deferred, like-kind exchange cash balance and/or other assets from the sale of the relinquished property in compliance with the Treasury Regulations. The Qualified Trust Account also ensures that the Exchangor’s exchange funds and/or assets are held as fiduciary funds and are therefore protected against claims from potential creditors of the Qualified Intermediary.

Qualified Use

An Exchangor must intend to use the property in their trade or business, to hold the property for investment or to hold the property for income production in order to satisfy the qualified use test.

Real Property

Land and buildings (improvements), including but not limited to homes, apartment buildings, shopping centers, commercial buildings, factories, condominiums, leases of 30-years or more, quarries and oil fields. All types of real property are exchangeable for all other types of real property. In general, state law determines what constitutes Real Property.

Real Estate Investment Trust (REIT)

A trust that invests primarily in real estate and mortgages and passes income, losses and other tax items to its investors. REITs are typically classified as a security and are therefore not exchangeable.

Real Property Exchange

The sale or disposition of real estate (relinquished property) and the acquisition of like-kind real estate (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Related Party

individuals and/or business entities determined by Section 267(b) of the Internal Revenue Code as having a special connection to the taxpayer/exchanger. A transaction between a related party and an exchanger may be restricted or prohibited in a 1031 exchange. Related parties include family members (spouses, children, siblings, parents or grandparents, but not aunts, uncles, cousins or ex-spouses) and a corporation in which you have more than a 50% ownership; or a partnership or two partnerships in which you directly or indirectly own more than a 50% share of the capital or profits.

Relinquished Property

The property to be sold or disposed of by the Exchangor in the tax-deferred, like-kind exchange transaction.

Replacement Property

The like-kind property to be acquired or received by the Exchangor in the tax-deferred, like-kind exchange transaction.

Reverse Exchange

A tax-deferred, like-kind exchange transaction whereby the replacement property is acquired first and the disposition of the relinquished property occurs at a later date.

Reverse/Improvement Exchange

The EAT can make improvements to the replacement property before transferring it to the taxpayer as part of a Reverse Exchange.

Revocable Trust

A trust in which the creator reserves the right to modify or terminate the trust at any time.

Rollover

A method by which an individual can transfer assets from one retirement program to another without the recognition of income for tax purposes. The requirements for a rollover depend on the type of program from which the distribution is made and the type of program receiving the distribution.

Roth IRA

A non-deductible IRA that allows tax-free withdrawals when certain conditions are met. Income and contribution limits apply.

S Corporation

A small, closely held corporation (75 or fewer investors) who elect to be taxed as a partnership where shareholders pay taxes on all earnings. This avoids double taxation of corporate income and dividend income that occurs in corporations.

Safe Harbors

Treasury Regulations provide certain Safe Harbors that assist Qualified Intermediaries and Exchangors in structuring tax-deferred, like-kind exchange transactions so they can be assured that no constructive receipt issues will be encountered during the exchange cycle.

Seller Carry-Back Financing

When the buyer of a property gives the seller of the property a note, secured by a deed of trust or mortgage. In a Section 1031 Exchange, seller carry-back financing is treated as boot, unless it is sold at a discount on the secondary market or assigned to the seller as a down payment on the replacement property.

Sequential Deeding

The former practice of transferring or deeding title to the Exchangor’s relinquished property to the Qualified Intermediary first and then sequentially and immediately transferring or deeding title from the Qualified Intermediary to the buyer in order to properly structure a tax-deferred, like-kind exchange prior to the issuance of Treasury Revenue Ruling 90-34. Sequential deeding is used only in special tax-deferred, like-kind exchange transactions today that require special structuring. (See Direct Deeding for the current day practice)

Simultaneous Exchange

A tax-deferred, like-kind exchange transaction whereby the disposition of the relinquished property and the acquisition of the replacement property close or transfer at the same time. A Simultaneous Exchange is also referred to as a Concurrent Exchange.

Starker Exchange

Another common name for the tax-deferred, like-kind exchange transaction based on a court decision that was handed down (Starker vs. Commissioner) in 1979. The Ninth Circuit Court of Appeals eventually agreed with Starker that its delayed tax-deferred, like-kind exchange transaction did in fact constitute a valid exchange pursuant to Section 1031 of the Internal Revenue Code. This ruling set the precedent for our current day delayed exchange structures.

Straight-line Depreciation Method

A depreciation method that spreads the cost or other basis of property evenly over its estimated useful life.

Tangible Personal Property

Property other than real estate that physically exists. Aircraft, business equipment and vehicles are examples of tangible personal property. Assets such as trademarks, patents and franchises only represent value and are therefore intangible property.

Tax-Deferral

The postponement of taxes to a later year, usually by recognizing income or a gain at a later time. Tax-deferred, like-kind exchange transactions are a common method of deferring capital gain and depreciation recapture taxes.

Tax-Deferred Exchange

The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Taxpayer

The person or entity that is completing the tax-deferred, like-kind exchange transaction, commonly referred to as the Exchangor.

Tenancy-In-Common Interest (Co-Tenancy)

A separate, undivided fractional interest in property. A tenancy-in-common interest is made up of two or more individuals, who have equal rights of possession. Co-tenants’ interests may be equal or unequal and may be created at different times and through the use of different conveyances. Each co-tenant has the right to dispose of or encumber his or her interest without the agreement of the other co-tenants. He or she cannot, however, encumber the entire property without the consent of all of the co-tenants. In an Internal Revenue Code Section 1031 Exchange, an Exchangor may acquire a tenancy-in-common interest with one or more other investors, as his or her like-kind replacement property. For purposes of Internal Revenue Code Section 1031 Exchanges, a co-tenancy must only engage in investment activities, including supporting services that would typically accompany the investment. Co-tenants that are engaging in separate business activities are treated as partnerships by the I.R.S.

Tenancy in Severalty

Separate ownership of property by one person.

Titleholder

The entity that owns/holds title to property. In an Internal Revenue Code Section 1031 Exchange, the titleholder of the relinquished property must generally be the same as the titleholder of the replacement property. If a taxpayer dies prior to the acquisition of the replacement property, his or her estate may complete the exchange. When the acquisition and disposition entities bear the same taxpayer identification numbers, such as disregarded entities (single-member LLCs and Revocable Living Trusts), the exchange usually qualifies.

Trust

A legal entity created by an individual in which one person or institution holds the right to manage property or assets for the benefit of someone else.

Trustee

An individual or institution appointed to administer a trust for its beneficiaries.

Do you Qualify? Answer some basic questions to determine whether an exchange is right for you and your current situation.

"WASHINGTON STATE LAW, RCW 19.310.040, REQUIRES AN EXCHANGE FACILITATOR TO EITHER MAINTAIN A FIDELITY BOND IN AN AMOUNT OF NOT LESS THAN ONE MILLION DOLLARS THAT PROTECTS CLIENTS AGAINST LOSSES CAUSED BY CRIMINAL ACTS OF THE EXCHANGE FACILITATOR, OR HOLD ALL CLIENT FUNDS IN A QUALIFIED ESCROW ACCOUNT OR QUALIFIED TRUST." RCW 19.310.040(1)(b) (as amended)