The sale or disposition of real estate or personal property, held for investment or business purposes (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.
A depreciation method used for most property placed into service from 1981 to 1986. This method allowed property to be depreciated at a faster rate than had been allowed previously. The modified accelerated cost recovery system (MACRS) replaced ACRS for assets placed into service after 1986.
A method of depreciation that allows you to deduct a greater portion of the cost of the depreciable property in the first years after the property is placed in service, versus spreading the cost evenly over the life of the asset, as with the straight-line depreciation method.
An unrelated party (IPX1031) who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the taxpayer’s relinquished property and the acquisition of the taxpayer’s replacement property. The Accommodator has no economic interest except for any compensation (exchange fee) it may receive for acting as an Accommodator in facilitating the exchange as defined in Section 1031 of the Internal Revenue Code. The Accommodator is technically referred to as the Qualified Intermediary, but is also known as the Accommodator, Facilitator, Intermediary or Qualified Escrow Holder.
Having direct access to your exchange funds or other property. Receiving exchange funds during the exchange period can invalidate your exchange. (See Constructive Receipt.)
A type of property interest made easily available to investors looking to do a 1031 exchange. With this type of investment, a proportionate share of a larger property is owned
The amount you use to determine your capital gain or loss from a sale or disposition of property. To determine the adjusted cost basis for your property, you must start with the original purchase cost.
Adjusted Basis = Purchase Cost + Improvements + Fees (selling costs and legal fees) – Accumulated Depreciation – Other Losses.
This is used in calculating capital gains when an asset is sold.
A purchase agreement, offer and acceptance, sale agreement, earnest money agreement, real estate contract, or other contract contemplating the purchase of sale of real property.
A purchase agreement, offer and acceptance, sale agreement, earnest money agreement, real estate contract, or other contract contemplating the purchase of sale of real property.
A method of calculating income tax that does not allow certain deductions, credits, and exclusions. The Alternative Minimum Tax was devised to ensure that individuals, trusts, and estates that benefit from tax preferences do not avoid paying any federal income taxes.
Anything owned that has monetary value.
Repositioning assets within a portfolio to maximize a return for a specific level of risk.
A category of investments that contain similar characteristics.
This refers to a 1031 exchange where the exchanger has deferred 100% of the capital gains taxes and depreciation recapture. To achieve this the exchanger should (A) purchase a property or properties that are equal to or greater than the value of the commercial property sold (B) use all the equity acquired from the sale of the relinquished property towards the purchase of the replacement property (C) obtain the same or greater debt on the replacement property that was on the relinquished property (See Partial Tax Deferment; Boot and Mortgage Boot/Relief.).
The original purchase price or cost of your property plus any out-of-pocket expenses, such as brokerage commissions, escrow costs, title insurance premiums, sales tax (if personal property) and other closing costs directly related to the acquisition.
An individual, company, organization, or other entity named in a trust, life insurance policy, annuity, will or other agreement who receives a financial benefit upon the death of the principal. A beneficiary can be an individual, company, organization, etc.
Property or cash the taxpayer receives in the 1031 exchange that is not considered “like-kind” and thus is taxable.
A tax-deferred, like-kind exchange whereby the Qualified Intermediary and/or Exchange Accommodation Titleholder acquires title and holds title to the replacement property on behalf of the taxpayer, during which time structures or improvements are constructed or installed on or within the replacement property. Also known as an Improvement Exchange.
Real property, tangible depreciable property, intangible property and other kinds of properties used in business. Exchanging one business for another is not permitted under the IRS Section 1031. However, taxpayers may exchange business assets on an asset-by-asset basis, usually as part of a Mixed-Property (Multi-Asset) Exchange.
The difference between the selling price of a property or asset and its Adjusted Cost Basis.
Tax levied by Federal and state governments on investments that are held for one year or more. Investments may include real estate, stocks, bonds, collectibles and tangible depreciable personal property.
For land or buildings, improvements (also known as capital improvements) are the expenses of permanently upgrading your property rather than maintaining or repairing it. Instead of taking a deduction for the cost of improvements in the year paid, you add the cost of the improvements to the basis of the property. If the property you improved is a building that is being depreciated, you must depreciate the improvements over the same useful life as the building.
The rate of return an investor wants to achieve on real property. The capitalization rate can provide for the return of the investment and the return on the investment (profit). To obtain a property’s capitalization rate, divide the net operating income of a property by its value. To determine a property’s value, divide the property’s net operating income by the desired capitalization rate. In the Income-Capitalization Method of real property appraisal, a capitalization rate is used to appraise a property’s value. The Income-Capitalization Method of appraisal is used to value investment property, such as apartment buildings, commercial office buildings and retail malls. (See Net Operating Income.)
Personal property (ex.such as baseball cards, coins, stamps, works of art and memorabilia) that is held for investment. They are exchangeable under Internal Revenue Code Section 1031 and are not subject to the same rate of taxation.
All property acquired by a husband and wife during their marriage. Each spouse has a right to an equal interest in the property. Gifts and inheritances received by an individual spouse during the marriage are treated as separate property. Property acquired by the spouse prior to marriage, property acquired with separate property or rents or profits generated from separate property are treated as separate property. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states.
A tax-deferred, like-kind exchange transaction whereby the disposition of the relinquished property and the acquisition of the replacement property close or transfer at the same time. A Concurrent Exchange is also referred to as a Simultaneous Exchange.
Exercising control over your exchange funds or other property. Control over your exchange funds includes having money or property from the exchange credited to your bank account or property or funds reserved for you. Being in constructive receipt of exchange funds or property may result in the disallowance of the tax-deferred, like-kind exchange transaction, thereby creating a taxable sale. (See Actual Receipt.)
A 1031 exchange on an open option to purchase or an open Sales Contract instead of on the real estate itself.
Language to be included in the Purchase and Sale Contracts for both relinquished and replacement property that indicates and discloses that the transaction is part of an intended tax-deferred, like-kind exchange transaction and requires that all parties cooperate in completing said exchange.
A tax deferred, like-kind exchange where there is a known delay or period of time between the closing of the relinquished property and the closing of the replacement property.
Property with a useful life of more than one year that is held for investment or used in your trade or business. You spread the cost of the asset over its estimated useful life rather than deducting the entire cost in the year that you placed the asset in service.
The reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion or other such factors. One is allowed to deduct depreciation from income on his or her income tax return.
The amount of gain resulting from the disposition of property that represents the recovery of depreciation expense that has been previously deducted on the taxpayer’s income tax returns.
A practice authorized by Treasury Revenue Ruling 90-34 whereby either the relinquished property or the replacement property can be deeded directly from seller to buyer without deeding the property to the Qualified Intermediary. (See Sequential Deeding for industry practices prior to Treasury Revenue Ruling 90-34.)
The sale or other disposal of property that causes a gain or a loss including like-kind exchanges and involuntary conversions.
Delaware Statutory Trust (DST) Investments are offered as replacement property for accredited investors seeking to defer their capital gains taxes through the use of a 1031 tax deferred exchange and as straight cash investments for those wishing to diversify their real estate holdings. The DST property ownership structure allows the smaller investor to own a fractional interest in large, institutional quality and professionally managed commercial property along with other investors, not as limited partners, but as individual owners within a Trust. Each owner receives their percentage share of the cash flow income, tax benefits, and appreciation, if any, of the entire property. DSTs provide the investor the potential for annual appreciation and depreciation (tax shelter), and most have minimum investments as low as $100,000 (even lower in some cases) allowing some investors the benefit of diversification into several properties.
An escrow account that limits the exchanger’s rights to benefit from the cash received from the sale of the relinquished property. It also ensures that the funds are protected against claims from creditors of the QI.
An unrelated party (TransUnion Reverse Exchange Corporation) that holds the Qualified Indicia of Ownership (customarily the title) of either the replacement or relinquished property in order to facilitate a reverse and/or build-to-suit tax-deferred, like-kind exchange transaction pursuant to Revenue Procedure 2000-37.
A written agreement between the Qualified Intermediary and the taxpayer setting forth the taxpayer’s intent to exchange relinquished property for replacement property, as well as the terms, conditions and responsibilities of each party pursuant to the tax-deferred, like-kind exchange transaction.
The period of time during which the taxpayer must complete the acquisition of the replacement property(s) in his or her tax-deferred, like-kind exchange transaction. The exchange period is 180 calendar days from the transfer of the taxpayer’s first relinquished property, or the due date (including extensions) of the taxpayer’s income tax return for the year in which the tax-deferred, like-kind exchange transaction took place, whichever is earlier, and is not extended due to holidays or weekends.
The rules for like-kind exchanges do not apply to property held for personal use (such as homes, boats or cars); cash; stock in trade or other property held primarily for sale (such as inventories, raw materials and real estate held by dealers); stocks, bonds, notes or other securities or evidences of indebtedness (such as accounts receivable); partnership interests; certificates of trust or beneficial interest; chooses in action.
The 1031 exchange is a popular strategy among real estate investors that allows them to defer capital gains taxes on the sale of an investment property by reinvesting the funds into another replacement property. For this reason, these exchanges are also referred to as a ‘Like-Kind’ exchange.
Outlined in IRS Code Title 26, Section 1031 (from which the exchange takes its name) the rule basically says that an exchange of one investment property for another similar property will not be recognized as a gain or loss, provided it is used for the purposes of business or trade.
There are a few specific requirements related to the handling of the transaction that must be followed. For example, the sell and subsequent purchase must be done through a qualified intermediary and at no time must the proceeds of the funds come into your hands. Also, there are strict deadlines for when the purchase and sale must occur within. For more on this, you can review EXCHANGE REQUIREMENTS here.
With the 1031 Exchange, real estate investors have an opportunity to defer capital gains taxes (which in some cases can a significant 30% to 40%) indefinitely if they continue to reinvest the capital back into other investment properties.
An undivided fractional interest or partial interest in property (Tenant-In-Common, Delaware Statutory Trust, etc.)
The period of time during which the taxpayer must identify potential replacement properties in his or her tax-deferred, like-kind exchange. The period is 45 calendar days from the transfer of the taxpayer’s relinquished property and is not extended due to holidays or weekends.
A tax-deferred, like-kind exchange whereby the Qualified Intermediary and/or Exchange Accommodation Titleholder acquires title and holds title to the replacement property on behalf of taxpayer, during which time new or additional structures or improvements are constructed or installed on or within the replacement property. Also known as a Build-To-Suit Exchange.
Section 1031 of the Internal Revenue Code allows a taxpayer to defer his or her capital gain tax and depreciation recapture tax when he or she exchanges relinquished property for like-kind or like-class replacement property.
Refers to the nature or character of the property and not to its grade or quality. Personal property listed or contained within the same general asset classification or product classification (“SIC Code”) will be considered to be of like-class and therefore like-kind.
The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.
Property that is exchangeable with another property. Refers to the nature or character of the property and not to its grade or quality.
An exchange that contains different types of properties, such as depreciable tangible personal property, real property, and intangible personal property. In a Mixed Property Exchange, relinquished properties are segmented in like-kind groups and matched with corresponding like-kind groups of replacement properties.
When you assume debt on your replacement property that is less than the debt on your relinquished property, you receive mortgage boot or mortgage relief. Generally speaking, mortgage boot received triggers the recognition of gain and is taxable, unless offset by cash boot added or given up in the exchange. (See Boot.)
Disposition and/or acquisition of more than one property in a Section 1031 Exchange.
A property’s gross income (scheduled rents and 100% vacancy factor) less its total annual expenses (including management costs, utilities, services, repairs, a vacancy factor and a credit loss factor) plus any additional other income (vending machines, coin laundry operations, etc.). Principal and interest payments on the mortgage and tax liability are not included.
A process or procedure whereby either the taxpayer’s relinquished property or replacement property is acquired by an Exchange Accommodation Titleholder (EAT) in order to facilitate a reverse and/or build-to-suit tax-deferred, like-kind exchange transaction pursuant to Treasury Revenue Ruling 2000-37.
An exchange that entails receiving cash, excluded property and/or non-like-kind property and/or any net reduction in debt (mortgage relief) on the replacement property, as well as an exchange of qualified, like-kind property. In the case of a partial exchange, tax liability would be incurred on the non-qualifying portion and capital gain deferred on the qualifying portion under Internal Revenue Code Section 1031.
A tax that is owed by the taxpayer, of which part of the tax is paid to the IRS when taxes are due. The remaining tax is postponed to a time when a new taxable event occurs.
A tax-deferred transfer of personal property (relinquished property) for other personal property (replacement property) that are of like-kind or like-class to each other.
Exclusion from capital gain tax on the sale of principal residence of $250,000 for individual taxpayers and $500,000 for couples, filing jointly, under Internal Revenue Code Section 121. Property must have been the principal residence of the taxpayer(s) 24 months out of the last 60 months. In the case of a dual-use property, such as a ranch, retail store, duplex or triplex, the taxpayer can defer taxes on the portion of the property used for business or investment under Internal Revenue Code Section 1031 and exclude capital gain on the portion used as the primary residence under Section 121.
An escrow account, wherein the Escrow Agent (Diversified Title Insurance Company) is not the taxpayer or a disqualified person and that limits the taxpayer rights to receive, pledge, borrow or otherwise obtain the benefits of the tax-deferred, like-kind exchange cash balance and/or other assets from the sale of the relinquished property in compliance with the Treasury Regulations. The Qualified Escrow Account also ensures that the taxpayer’s exchange funds and/or assets are held as fiduciary funds and are therefore protected against claims from potential creditors of the Qualified Intermediary.
The contractual arrangement between the taxpayer and the Exchange Accommodator Titleholder whereby the EAT holds a parked property pursuant to Revenue Procedure 2000-37.
An unrelated party (TransUnion Exchange Corporation) who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the taxpayer’s relinquished property and the acquisition of the taxpayer’s replacement property. The Qualified Intermediary has no economic interest except for any compensation (exchange fee) it may receive for facilitating the exchange as defined in Section 1031 of the Internal Revenue Code. The Qualified Intermediary is the correct technical reference pursuant to Treasury Regulations, but the Qualified Intermediary is also known as the Accommodator, Facilitator or Intermediary.
In a 1031 exchange, the taxpayer must have the intent to hold the property for investment or for income production in order to satisfy the qualified use test.
Land and buildings or land improvements resulting from human effort including buildings and machinery sited on land and various property rights over the preceding (ex. homes, apartment buildings, shopping centers, commercial buildings, factories, condominiums, leases of 30-years or more, quarries and oil fields.) All types of real property are considered like-kind and thus exchangeable for all other types of real property in a 1031 exchange. In general, state law determines what constitutes Real Property.
Individuals and/or business entities determined by Section 267(b) of the Internal Revenue Code as having a special connection to the taxpayer/exchanger. A transaction between a related party and an exchanger may be restricted or prohibited in a 1031 exchange. Related parties include family members (spouses, children, siblings, parents or grandparents, but not aunts, uncles, cousins or ex-spouses) and a corporation in which you have more than a 50% ownership; or a partnership or two partnerships in which you directly or indirectly own more than a 50% share of the capital or profits.
The property to be sold or disposed of by the taxpayer in the tax-deferred, like-kind exchange transaction.
The like-kind property to be acquired or received by the taxpayer in the tax-deferred, like-kind exchange transaction.
A tax-deferred, like-kind exchange transaction whereby the replacement property is acquired first and the disposition of the relinquished property occurs at a later date.
The EAT can make improvements to the replacement property before transferring it to the taxpayer as part of a Reverse Exchange.
Guidelines that must be followed when identifying properties in a 1031 deferred exchange (see the 95% Rule, 200% Rule, and Three Property Rule).
A trust that invests in real estate and mortgages and passes income, losses, and other tax items to its investors. REITS are typically classified as a security and are therefore not exchangeable.
As described by the IRS, any person bearing a relationship to the taxpayer (spouse, child, sibling, parent, grandparents but not aunts, uncles, cousins or ex-spouses), a corporation in which the exchanger has more than a 50% ownership, and a partnership in which the exchanger owns more than a 50% share of the capital or profits.
Treasury Regulations provide certain Safe Harbors that assist Qualified Intermediaries and taxpayers in structuring tax-deferred, like-kind exchange transactions so they can be assured that no constructive receipt issues will be encountered during the exchange cycle.
When the buyer of a property gives the seller of the property a note, secured by a deed of trust or mortgage. In a Section 1031 Exchange, seller carry-back financing is treated as boot, unless it is sold at a discount on the secondary market or assigned to the seller as a down payment on the replacement property.
The former practice of transferring or deeding title to the taxpayer’s relinquished property to the Qualified Intermediary first and then sequentially and immediately transferring or deeding title from the Qualified Intermediary to the buyer in order to properly structure a tax-deferred, like-kind exchange prior to the issuance of Treasury Revenue Ruling 90-34. Sequential deeding is used only in special tax-deferred, like-kind exchange transactions today that require special structuring. (See Direct Deeding for the current day practice)
A tax-deferred, like-kind exchange transaction whereby the disposition of the relinquished property and the acquisition of the replacement property close or transfer at the same time. A Simultaneous Exchange is also referred to as a Concurrent Exchange.
Another common name for the tax-deferred, like-kind exchange transaction based on a court decision that was handed down (Starker vs. Commissioner) in 1979. The Ninth Circuit Court of Appeals eventually agreed with Starker that its delayed tax-deferred, like-kind exchange transaction did in fact constitute a valid exchange pursuant to Section 1031 of the Internal Revenue Code. This ruling set the precedent for our current day delayed exchange structures.
A depreciation method that spreads the cost or other basis of property evenly over its estimated useful life.
The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.
Client, investor, exchanger.
A separate, undivided fractional interest in property. A tenancy-in-common interest is made up of two or more individuals, who have equal rights of possession. Co-tenants’ interests may be equal or unequal and may be created at different times and through the use of different conveyances. Each co-tenant has the right to dispose of or encumber his or her interest without the agreement of the other co-tenants. He or she cannot, however, encumber the entire property without the consent of all of the co-tenants. In an Internal Revenue Code Section 1031 Exchange, an taxpayer may acquire a tenancy-in-common interest with one or more other investors, as his or her like-kind replacement property. For purposes of Internal Revenue Code Section 1031 Exchanges, a co-tenancy must only engage in investment activities, including supporting services that would typically accompany the investment. Co-tenants that are engaging in separate business activities are treated as partnerships by the I.R.S.
In 1031 tax exchanges the exchanger may identify up to three properties without regard to their value.
In tax deferred exchanges, the exchanger may identify any number of properties without regard to their value as long as the exchanger purchases 95% of the fair market value of the properties identified.
The exchanger may identify more than three properties provided their fair combined market value does not exceed 200% of the relinquished property in a 1031 exchange.