180 days
Total time allotted to acquire the replacement property. Must be one of the properties designated in the identification period.
45 Days
Total time allotted to identify potential replacement property. Timeframe for the deadline is triggered upon the transfer of the relinquished property.
200% Rule
You may identify any number of replacement properties for your relinquished property as long as the aggregate value of those properties does not exceed 200% of the value of your relinquished property.
3-property rule
You may identify up to three (3) replacement properties for your relinquished property regardless of the value of the properties. More than 95% of exchanges use the 3-property rule.
95% exemption
You may identify any amount of properties as possible replacements for your relinquished property as long as you end up purchasing at least 95% of the aggregate value of all properties identified.
Accommodator
A professional who facilitates 1031 exchange transactions. Also called a "Qualified Intermediary (QI)" or "Facilitator".
Adjusted Basis
The original cost of a property, plus the value of improvements, minus any depreciation taken.
Basis
The value assigned to a taxpayer's investment in a property used to compute gain or loss.
Boot
Also called "taxable boot", this is money or property that is returned to the taxpayer or is not eligible for exchange due to like-kind property rules. Boot is taxable.
Build to Suit Exchange
Also called a "Construction Exchange" or an "Improvement Exchange", allows taxpayer utilize exchange proceeds to make improvements or add new construction to their replacement property. This type of exchange requires specific structuring to protect the taxpayer from taking ownership to the replacement property prior to the improvements being completed.
Capital Gain
Increased capital in business or investment property through appreciation. The difference between the selling price and the adjusted basis of a property. This gain may be taxed by both the Federal and State government, although the rates will vary. Please consult your accountant to determine what your overall tax consequence will be.
Construction Exchange
Also called a "Construction Exchange" or an "Improvement Exchange", allows taxpayer utilize exchange proceeds to make improvements or add new construction to their replacement property. This type of exchange requires specific structuring to protect the taxpayer from taking ownership to the replacement property prior to the improvements being completed.
Court Case
Court cases represent the Tax Courts interpretation of the tax law and rulings established in a court case are binding to the taxpayer. Court cases have impact on changes to the law.
Delayed Exchange
Considered the standard type of exchange. Also called a "Deferred Exchange".
Depreciation
Assumption that as property ages, it loses value. Depreciation is used as a tax deduction on business or investment property. Different types of property are allowed different amounts of depreciation each year, called the depreciation schedule. If a property is depreciated to a value below it's actual market value, depreciation recapture tax will be due on the difference.
Depreciation Recapture
Tax deductions can be taken as a property depreciates. If the property is sold at a higher value than it's depreciation deductions would show, depreciation recapture tax is due on the difference. Please consult your own tax advisor to determine your depreciation recapture consequence.
EAT
Abbreviation for "Exchange Accommodation Titleholder" which is the IRS's official term for a special purpose entity that buys and holds a property for the taxpayer in a reverse exchange.
Escrow
This is an agreement between two or more parties providing that certain instruments or property be placed with a third party for safekeeping; pending the fulfillment or performances of a specified act or condition.
Exchange Agreement
A document prepared at the beginning of an exchange outlining all the understandings between the taxpayer and the Qualified Intermediary. This document must be signed by the taxpayer before the exchange can begin.
FEA
Abbreviation for the "Federation of Exchange Accommodators", the professional organization fo the exchange industry. You can learn more about the FEA on this site or at www.1031.org
Facilitator
A professional who facilitates 1031 exchange transactions. Also called a "Qualified Intermediary (QI)" or "Accommodator".
Form 8824
To report a 1031 exchange Form 8824 must be completed as a part of your federal tax return The form reports your realized gain, recognized gain, your new basis, the date you sold your relinquished property, and the dates you identified and acquired your replacement property. Form 8824 is actually a supporting form for IRS Form 4797.
Gain
In simple terms, Gain is the amount of appreciation your property has earned since being purchased (plus the amount of any depreciation previously taken).
Identification
The act of describing potential replacement properties in writing as a part of a 1031 exchange. Identification must be completed within 45 days of the sale of your relinquished property. There are guidelines for properly identifying property, see the Identification page on this website for more information.
Improvement Exchange
Also called a "Construction Exchange" or an "Improvement Exchange", allows taxpayer utilize exchange proceeds to make improvements or add new construction to their replacement property. This type of exchange requires specific structuring to protect the taxpayer from taking ownership to the replacement property prior to the improvements being completed.
Internal Revenue Code
This is the tax law that was established by congress. It is written in general terms, so much can be left up to interpretation (See definitions for Revenue Ruling, Private Letter Ruling, and Court Cases). However, some items which are explicitly outlined in the code must be followed as they are written. Examples in Section 1031 include the 45 and 180 day deadlines and like-kind definitions.
Intent
For a property to qualify for an exchange, the taxpayer must prove their intent was to hold the property for business or investment purposes. There is no definitive rules on how intent can be defined, so the taxpayer bears the burden of proof if their intent is called into question.
LLC
An abbreviation for "Limited Liability Company". An LLC is the most commonly used ownership entity for real estate which is "parked" in an exchange. An Exchange Accommodation Titleholder (EAT) will typically use an LLC as a "Special Purpose Entity" to "park" property in an exchange to facilitate improvements and/or a reverse scenario.
Like Kind
In 1031 exchanges, money from the sale of property must be reinvested in property that is deemed to be the same type as the property sold. This is called "Like Kind property". Nearly all Real Estate is like-kind, while determining like-kind status for different types of personal property is more restrictive.
Net Sales Price
The Net sales price is the Gross Sales price of your property less commissions and fees.
Private Letter Ruling
Represents the IRS's view on a specific transaction, a private letter ruling is an informational statement by the IRS interpreting how a statute or administrative rule applies to a particular set of facts or circumstances. Typically addresses a situation specific to a particular taxpayer and is generally not binding, as it is merely giving guidance on the IRS's current position. Taxpayers can refer to private letter rulings issued to other taxpayers to determine how their situation, if similar, may be interpreted by the IRS. However, a specific private letter ruling does not mean the IRS will rule the same way in a future similar situation -- For instance if significant time has passed since the original ruling and laws or circumstances may have changed during that time. However, a private letter ruling for a set of circumstances does offer a platform for argument if a future case is questioned. Some 1031 strategies are based on private letter rulings and any associated risk. Although a taxpayer is ultimately responsible for the decision to pursue a specific tax strategy, the qualified intermediary should inform them of associated risks.
QEAA
Abbreviation for Qualified Exchange Accommodation Agreement, a document completed in order to qualify a Reverse Exchange for safe harbor treatment.
Qualified Intermediary
A professional who facilitates 1031 exchange transactions. Typically abbreviated "QI". Also called a "facilitator or "accommodator".
REIT
Abbreviation for Real Estate Investment Trust, REITs are companies that buy, sell, manage and develop real estate by combining the assets of many people similar to a mutual fund. A share of the income generated from the property owned in the REIT is then paid out to all the investors.
Realized Gain
Difference between the total value received for a property and the adjusted basis.
Recognized Gain
Portion of the realized gain, which is ultimately taxable. Not all realized gain is ultimately determined to be taxable and issues, such as boot, can affect how and when gain is recognized.
Relinquished Property
Property the Exchanger owns and wants to sell in a 1031 Exchange.
Replacement Property
Property the Exchanger wants to acquire to complete a 1031 Exchange.
Revenue Ruling
The IRS's published opinion that indicates how they might rule on future situations with similar circumstances. Although IRS opinion is not law, the revenue ruling has the force of law unless or until the federal tax court (or a newer revenue ruling) replaces it. Revenue rulings can be challenged by a taxpayer.
Reverse Exchange
Allows the taxpayer to purchase their replacement property before selling their relinquished property.
Stepped Up Basis
This is an income tax term used to describe a change in the adjusted tax basis of property, allowed for certain transactions. The old basis is increased to market value upon inheritance, as opposed to a carry-over basis in the event of a tax free exchange.
TIC
An abbreviation for Tenant in Common, which is a property that is jointly owned by up to 35 people and managed by a sponsor. Most TICs are classified as securities, and have to meet a set of guidelines to be recognized as real estate for an exchange rather than a partnership (partnership interests are not like-kind to real estate). TIC's are popular investments that can serve as replacement property in an exchange.
Undivided Interest
When two or more owners of a property own individually deeded portions of the property. "Tenant in Common" properties, abbreviated "TIC" are set up as undivided interests.
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