Industry Terms

Real estate brokerage company with expertise in §1031 Exchanges whose main function is to represent the interests of the §1031 buyer rather than the property broker who has a fiduciary responsibility to the seller.

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.

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.

Year when the IRS held a hearing to "clean up" the Tax Reform Act of 1984 and provide uniform terminologies. A main outcome of this revision was that the IRS eventually opted to accept Delayed Exchanges instead of fighting them.

A qualified intermediary who agrees to assist the Exchangor 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.

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.

An increase in an asset’s value.

The division of 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.

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

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

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

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.

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).

An extended period of rising value of the overall market.

Party that wants to acquire the Exchangor's property. For a three- or four-party exchange, the buyer usually has cash.

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

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

A measure of the ratio between the net operating income produced by an asset (usually real estate) and its capital cost (the original price paid to buy the asset) or alternatively, its current market value.

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.

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

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

Control of the cash earnings without real physical possession by the Exchangor or their agent.

Tax on an exchange transaction that 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.

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

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 of the transfer of the Relinquished Property, and the Exchangor must receive all Replacement Properties within 180 days or the due date of the Exchangor's tax return, whichever comes first.

Decline in value of an asset. Property depreciation occurs due to general wear and tear.

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 gains tax rates for depreciation recapture.

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.

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

The practice of investigating a potential investment.

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

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.

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

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 in 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.

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

The replacement property must be identified within 45 days of the close of escrow/closing the relinquished property. If the 45th day falls on a weekend or legal holiday, the deadline is not to be extended.

Real estate that generates cash flow.

The party that facilitates a tax-deferred exchange by acquiring and selling property in an exchange. The intermediary plays a role in almost all exchanges these days. He or she neither begins nor ends the transaction with any property. He or she buys and then resells the properties in return for a fee.

The degree to which an investor or business is using borrowed money.

Any valid property for any other valid property, if the property(s) are held for productive use in trade, business, or for investment purposes.

To convert assets into cash.

The ability of an asset to be quickly converted into cash.

A self-regulatory securities industry organization responsible for the operation and regulation of the stock market and for conducting regulatory reviews of members' business activities.

A property lease in which the tenant pays all expenses normally associated with ownership, such as utilities, maintenance, repairs, insurance, and taxes.

Total assets minus total liabilities of an individual or company.

A lease that requires the tenant to pay for property taxes, insurance, and maintenance in addition to the rent (also referred to as Net Net Net Lease or Triple Net Lease).

A loan with terms that specify that in the event of failure to repay, the lender’s sole remedy will be to foreclose against the property securing the loan.

The day-to-day expenses of running a business.

Income other than capital gains.

Income derived from business investments in which the individual is not actively involved, such as a real estate limited partnership.

All investments collectively owned by the same individual or organization.

The corporation who acts as the accommodator in the exchange. A qualified intermediary is identified as follows:

• Not a related party to the Exchangor, (e.g. agent, attorney, broker, etc.);
• Receives a fee;
• Acquires the relinquished property from the Exchangor; and
• Acquires the replacement property and transfers it to the Exchangor.

Gain that is not necessarily taxed. In a successful exchange the gain is realized but not recognized and thus not taxed.

Amount of gain that is subject to tax when property is disposed of at a gain or profit in a taxable transfer.

An individual who is licensed to sell securities and has the legal power of an agent, having passed the Series 7 and Series 63 examinations. Usually works for a brokerage licensed by the SEC, NYSE, and NASD.

Old property that is being sold by the Exchangor. (Formerly called the "Downleg" property, currently called Phase I property).

New property being acquired or the target property being brought by Exchangor. (Formally called up leg property, currently called Phase II property).

The profit made on an investment, expressed annually as a percentage of the total amount invested.

The possibility of loss of capital on an investment.

Term identifying the requirements to protect the Exchangor's money and the "Qualified Intermediary."

The primary federal regulatory agency for the securities industry, whose responsibility is to promote full disclosure and to protect investors against fraudulent and manipulative practices in the securities markets.

A non-profit membership corporation established by Congress that insures securities and cash in customer accounts up to $500,000 (up to $100,000 in cash) in the event of brokerage bankruptcy.

The person who owns the property that the taxpayer wants to acquire in the exchange in a three- or four-party exchange.

Property that's deeded to the Intermediary whereby the Intermediary deeds to the final owner.

Also referred to as a concurrent exchange when the Exchangor transfers out of the Relinquished Property and receives the Replacement Property at the same time.

Exchange without any time between the sale and purchase.

A term used to describe delayed exchanges. "Starker vs. Commissioner" established the delayed-exchange concept. The term "Starker Exchange" is also used to refer to delayed, deferred, or any other non-simultaneous exchange.

In the Tax Reform Act of 1984, Congress addressed the IRS's continued displeasure with the Starker decision by amending Section §1031 to allow Delayed Exchanges; but only if all of the exchange property is identified and acquired within specific deadlines (see Exchange Period). And most importantly, in the Conference Report accompanying the 1984 Act, Congress specifically reaffirmed that a "sale" followed by reinvestment in like-kind property doesn't qualify for tax deferral under Section §1031. So to qualify for tax deferral, it is still essential to cautiously structure an exchange to avoid actual or constructive "receipt" of proceeds of sale and to prevent characterization of the transaction as a taxable sale and reinvestment.

A technique that allows an investment to be legally exempt from federal, state, and local taxes to varying degrees.

Having other tax benefits that typically result in tax savings.

Also known as the Exchangor. A taxpayer 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.

Any cash paid by way of commission or other expense in an exchange. Transaction costs are deducted in computing the consideration received.

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.

Perceived to be below its value.