1031 Exchange Real Estate Glossary

Welcome to our comprehensive guide on glossary terms for a 1031 real estate exchange. Navigating the world of real estate can be complex, especially when it comes to the specialized process of a 1031 exchange. No matter where you are in your real estate investment journey, understanding the terminology is crucial to making informed decisions and maximizing your investment potential.

In this blog, we'll break down the essential terms you'll encounter during a 1031 exchange. From "like-kind property" to "qualified intermediary," our goal is to demystify the jargon and provide clear, concise definitions that will enhance your understanding and confidence. Join us as we explore the language of 1031 exchanges, helping you to make the most of this valuable real estate tool.

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Potential Profits, Losses and Taxes

Adjusted basis: Typically, the adjusted basis of a property is calculated as the purchase price plus any capital improvements, minus depreciation. However, certain transactions, such as exchanges, gifts, probates and trust distributions can affect the property's adjusted basis. It is essential for the exchanger to consult with their tax or legal advisor to accurately ascertain the adjusted basis.

Basis:
The original cost of the property used to ascertain gain or loss in the transaction.

Boot:
Any property or value received that is not like-kind to the property being exchanged. This can include cash, mortgage notes, stock or other non-like-kind property. The value of the boot received is taxable to the extent of the realized gain from the exchange.

Capital gain:
‍The difference between the property's selling price and its adjusted basis.

Constructive receipt:
The exchanger is deemed to have constructive receipt of money when it is credited to them, set aside for them or otherwise made available for their immediate use. The taxpayer is not permitted to pledge, borrow or otherwise use the exchange proceeds as collateral. Additionally, if an agent of the taxpayer receives the money, it is considered as if the exchanger has received it directly. To avoid constructive receipt, the exchanger must adhere to the restrictions outlined in the safe harbors specified in Treasury Regulations under 1.1031(k)-1(g).

Deferral:
Until the exchanger sells the replacement property, payment of capital gains tax is delayed. This can only be avoided if the exchanger initiates another exchange.

Realized gain:
If an exchange is executed properly, the gain is present (realized) but not taxed.

Recognized gain:
Taxed gain.

Transfer tax:
A city, county or state may issue a tax when the property is transferred. 

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Important Parties Involved 

Accommodator, qualified intermediary (QI) or facilitator:
A qualified intermediary (QI), also known as an accommodator or facilitator, is an individual or entity that aids the exchanger in executing a tax-deferred exchange. The QI holds the exchange proceeds and acts as the principal in both the sale of the relinquished property and the purchase of the replacement property. The QI cannot be the taxpayer, a related party or an agent of the taxpayer.

Exchange Accommodation Titleholder (EAT):
In the case of a reverse exchange, an entity that holds the title of the relinquished property or a replacement property is the exchange accommodation titleholder (EAT). This name also applies to the titleholder of the replacement property in an improvement exchange.

Related party:
According to IRS regulations IRC 267(b) and 707 (b)(1), a person or entity is a related party if they have a relationship with the exchanger, i.e., family members, business partnerships, etc. and that person or entity owns more than 50% of the entity in stock, capital or profits.

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Timing

Exchange period:
The 180-day period applied to acquiring a replacement property in a delayed exchange or disposing of a relinquished property in a reverse exchange. Each must be completed within 180 days.

Identification period:
An exchanger must name, in writing, the replacement property (or properties) they plan to purchase within 45 days of the sale of the original property. The following strict rules apply: only three properties may be identified, unless the fair market value of all properties listed doesn’t amount to more than a 200% value of the relinquished property, or if they end up purchasing 95% of the properties listed.

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More

Qualified Exchange Accommodation Agreement (QEAA):
The EAT pledges to purchase and hold the title in a reverse or improved exchange in this contract.

Relinquished property:
The property sold in an exchange.

Replacement property:
The property purchased in an exchange.

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Mastering terms associated with a 1031 real estate exchange is essential for navigating this powerful tax-deferral strategy with confidence. By delving into the nuances of these terms, investors can make informed decisions, mitigate risks and maximize returns on their real estate ventures. 

As you embark on your journey into 1031 exchanges, remember that continuous learning and staying informed are vital. Consultation with experienced professionals, such as tax advisors and qualified intermediaries, can provide invaluable guidance tailored to your specific circumstances.

With this glossary as your companion, may your ventures into the realm of 1031 exchanges be fruitful and rewarding. Happy investing!

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Learn even more with National 1031, your expert in guiding you through a 1031 exchange and serving as your Qualified Intermediary. Contact us today with your 1031 exchange questions using the form below.