GLOSSARY

A

Actual Receipt - When the Exchangor actually receives the funds from the sale of the Relinquished Property. Receipt of cash by the Exchangor before he receives the Replacement Property may be enough to destroy the tax-deferred treatment of the transaction.

Adjusted Basis - The purchase price, plus capital improvements, less depreciation. Transactions involving exchanges, gifts, probates and trust distributions may impact the property’s adjusted basis.

B

Basis - The starting point for determining gain or loss in any transaction. In general, basis is the cost of the property.

Boot - Real estate property or proceeds that the taxpayer receives in the 1031 exchange that does not qualify as “like-kind” property. Boot is subject to taxes.

C

Capital Gain - Capital gain is calculated as follows: total selling price of the Relinquished Property, less exchange expenses, less the Relinquished Property’s adjusted basis. The adjusted basis is the original cost, plus the cost of capital improvements, less depreciation or cost recovery deductions.

Constructive Receipt - A critical issue in the Delayed Exchange. If the Exchangor has control over the exchange proceeds or property during the exchange period, he may be deemed in constructive receipt. If the Exchangor actually or constructively receives the exchange proceeds or property, the exchange may not qualify under IRC Section 1031.

D

Delayed Exchange - A 1031 exchange where the purchase of the Replacement Property can take place up to 180 days from the sale of the Relinquished Property. Also called a Starker Exchange.

E

Exchange Funds Account - The account established by the Qualified Intermediary to hold the exchange funds.

Exchange Period - The 180-day window or the due date of the Exchangor’s tax return, whichever comes first, in which the Exchangor has to complete a tax-deferred exchange. During the exchange period there is a 45-day identification period in which the Exchangor must identify which property or properties will be purchased.

Exchangor - Another name for the property owner wishing to sell one property and buy another “like-kind” Replacement Property and defer capital gain taxes on the proceeds.

I

Identification Period - The time period that begins upon the transfer of the Relinquished Property. During this 45-day period, the Exchangor must identify the Replacement Property in order to continue with the Section 1031 exchange transaction.

L

Like-Kind Property - The Replacement Property in a 1031 exchange that is similar in classification or characteristics to the Relinquished Property. Like-kind property cannot be a primary residence or a second home and must be held for business or investment purposes.

Q

Qualified Intermediary - The third party that helps facilitate a 1031 exchange transaction. Also called the Accommodator.

R

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.

Relinquished Property - The original property being sold by the taxpayer when making an exchange.

Replacement Property - The new property being acquired by the taxpayer when making an exchange.

Reverse Exchange - A 1031 exchange where the Replacement Property is bought first and the sale of the Relinquished Property occurs afterward.

S

Safe Harbor - Specifications used to protect the property seller’s money and the Qualified Intermediary in a 1031 exchange. Parameters suggested by the IRS which when followed will result in drastically reduced scrutiny.

Seller - Individual or entity that owns Replacement Property desired by the taxpayer.

T

Tax-Deferred Exchange - A transaction that allows one to reinvest the proceeds from the sale of any property held for investment or business purposes (Relinquished Property) to another like property (Replacement Property) and defer capital gain taxes that would otherwise be due on the first sale. Also called a 1031 exchange, Starker Exchange, like-kind exchange and Delayed Exchange.

Transfer Tax - 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.