1031 Exchange: A transaction in which
the Taxpayer (or Exchanger) transfers property held for productive
use in trade or business, or for investment (the Relinquished
Property) and in exchange, receives like-kind property to be held
for productive use in trade or business, or for investment (the
Replacement Property). Also known as an “exchange” or
a “tax deferred exchange.”
Boot: Boot is any type of property received
in an exchange that is not like-kind, such as cash, mortgage notes,
or stock. The Exchanger pays taxes on the boot to the extent of
recognized capital gain. In an exchange, any funds not used to
purchase the replacement property will be called boot.
Capital Gain: This is the difference
between the net sale price of the relinquished property and the
adjusted basis of the property.
Constructive Receipt: The control of
exchange proceeds (cash or other property) by the Taxpayer, their
agent, or some other means.
Deferral: The income tax due on the sale
or transfer of the Relinquished Property is not paid at the time
of disposition of the Relinquished Property. The income tax may
be paid at the time of the disposition of the Replacement Property.
Delayed Exchange: A tax deferred exchange
in which the Taxpayer acquires the Replacement Property after
the Relinquished Property has been transferred.
Disqualified Person: A person bearing
a relationship to the Taxpayer who is considered an agent of the
Taxpayer at the time of the transaction. A person who has acted
as the taxpayer’s employee, attorney, accountant, investment
banker or broker, or real estate agent or broker within the previous
two-year period.
Exchange Accommodation Titleholder: The
special purpose entity that holds title to either the Relinquished
Property or Replacement Property as part of a reverse or construction
exchange. In most cases, the EAT is affiliated with the Qualified
Intermediary handling the reverse exchange.
Exchange Period: The period during which
the Exchanger must acquire Replacement Property in the tax-deferred
exchange. The Exchange Period begins on the date Exchanger transfers
the Relinquished Property to the Qualified Intermediary, who subsequently
transfers it to the Buyer. The period ends on the earlier of midnight
of the 180th day thereafter or the due date (including extensions)
the Exchanger's tax return for the taxable year in which the transfer
of the Relinquished Property occurs.
Identification Period: The period during
which the Exchanger must identify Replacement Property in the
tax-deferred exchange. The Identification Period begins on the
date Exchanger transfers the Relinquished Property to the Qualified
Intermediary, who subsequently transfers it to the Buyer. The
period ends at midnight of the 45th day thereafter.
Like-Kind Property: Property that qualifies
for Replacement Property in a tax deferred exchange. The term
“like-kind” refers to the nature or character of the
property and not to its grade or quality. Real property located
in the United States and real property located outside the United
States is not like-kind. Personal property must be either the
same General Asset Class or Product Class.
Qualified Intermediary: The person or
entity that acquires the Relinquished Property from the Exchanger,
conveys it to the Buyer, acquires the Replacement Property from
the Seller, and conveys it to the Exchanger. Although the Treasury
Regulations use the term “Qualified Intermediary,” some
companies use the term accommodator, facilitator, straw man, intermediary,
or QI.
Qualified Exchange Accommodation Agreement:
This is a binding contract used in reverse and construction exchanges.
It must be entered into between the taxpayer and the exchange
accommodation titleholder (EAT – see definition) within five
business days after title to property has been transferred to
the EAT.
Realized Gain: Refers to gain that is
not yet taxed. In a successful exchange the gain is realized but
not recognized and therefore not taxed.
Recognized Gain: Refers to the amount
of gain that is subject to tax when property is disposed of at
a gain or profit in a taxable transfer.
Relinquished Property: The property given up by the Exchanger
in a 1031 exchange. This is known as the old property or the Phase
I of an exchange.
Replacement Property: The property purchased
by the Exchanger in a 1031 exchange. This is known as the new
property or the Phase II of an exchange.
Safe Harbor: The regulations set forth
for safe harbor rules for avoiding constructive receipt of funds.
If the transaction qualifies within one of the four safe harbor
rules, the taxpayer should be protected under IRS audit.
Tax Deferred Exchange: A tax-deferred
exchange is an investment strategy that allows you to protect,
grow and diversify your assets - tax-free. As long as you use
all equity from the sale of a business or investment property
to purchase more like-kind property, you can defer your capital
gains taxes.
