§: Symbol for the word “Section” in the tax code
§ 1031 Exchange: The swap of qualifying* like-kind** real estate (relinquished property) for other qualifying like-kind real estate (replacement property) structured pursuant to § 1031 of the Internal Revenue Code to defer payment of capital gains, depreciation recapture, and state taxes. Buying power is increased when the tax savings is reinvested in replacement property. *See Qualifying property; ** See Like-kind
Basis / Adjusted basis: The starting point for determining gain or loss when disposing of a property is the initial cost of property (or the basis brought into the property through an exchange) plus capital improvements less depreciation taken. When contemplating an exchange, it is wise to confirm basis with your CPA and quantify the potential tax obligation to ensure an exchange is beneficial.
Boot: Any “consideration” (money, payments for non-qualifying expenses, unreplaced debt, etc.) received by taxpayer through an exchange is potentially taxable. Boot is taxed unless there are offsetting losses. Consult your CPA to learn whether you have carry-forward losses when doing an exchange. At the close of an exchange, receipt of unused exchange funds is called “cash boot” and non-replaced debt relief is called “debt relief boot”.
Build-To-Suit Exchange*: QI can take title to replacement property and pay for new construction managed by client to utilize exchange funds and increase property value. QI sells improved property to client within the 180-day exchange period. *Also refer to Improvement Exchange.
Certified Exchange Specialist (CES®): The CES® designation is awarded to QIs that prove their knowledge in all aspects of exchanges by passing a rigorous test that can only be taken by candidates with 3 years of full-time work experience/training with a QI company and exemplary ethical standards. This professional certification program requires designees to maintain the highest ethical standards and dedication to ongoing education. *Also see Federation of Exchange Accommodators
Concurrent Exchange: An exchange in which the purchase closes the same day or first business day following the close of the sale
Consideration: Cash, notes and/or other property received as payment for property sold
Constructive receipt: Any control or access to control of exchange proceeds during the exchange whether exercised or not
Debt relief: When a loan is paid off at the close of a sale it is called “debt relief.” The debt you are relieved of must be replaced in the purchase. Non-replaced debt relief is equally as taxable as cash received and is called “debt relief boot”.
Delayed Exchange: An exchange in which there is a period of time between the close of the sale and the completed purchase of all replacement property
Depreciation recapture: If trading down to a lower priced property, or from a depreciable asset to raw land, and cash, debt relief or other non-like-kind consideration is received, depreciation deductions in excess of straight-line under § 1250 must be recaptured @ 25%.
If you do not exchange, depreciation recapture is taxed at 25%.
Direct deeding: A deed from taxpayer/seller directly to buyer of the property being sold, and/or a deed from seller directly to taxpayer/buyer through the exchange. (Sequential deeding would have deeds from taxpayer/seller to Amherst, then from Amherst to buyer on the sale side of the exchange, and deeds from seller of the replacement property to Amherst, then from Amherst to taxpayer/buyer, which is an antiquated, never actually required deeding sequence.)
EAT / Exchange Accommodation Titleholder: The facilitating party that holds title to the parked property in a reverse exchange
Exchange period: A period of 180 days following the transfer of the property being sold. The exchange must be completed within the 180-day exchange period.
Exchanger: Person(s) or entity that owns the asset (property) being exchanged, also called the taxpayer, or client
Federation of Exchange Accommodators (FEA): The national trade association for exchange practitioners, FEA provides ongoing educational and professional opportunities to QIs and maintains close communication with congress on exchange issues.
* Also see Certified Exchange Specialist
Foreign property: Like-kind to and can be exchanged for other foreign property but cannot be traded for domestic property
Gain (or loss): The difference between adjusted sale price and adjusted basis. A loss cannot be recognized in an exchange so consulting your CPA prior to entering into an exchange can be invaluable.
Identification period: Exchanger has 45 days following the transfer of the property being sold to identify possible replacement properties.
A Letter of Identification naming potential replacement properties must be received by Amherst within the identification period, no later than midnight PST on the 45th day. Weekends and holidays are included in the 45-day count.
Improvement Exchange*: QI can take title to replacement property and pay for improvements managed by client to utilize exchange funds and increase property value. QI sells improved property to client within the 180-day exchange period. *Also refer to Build-To-Suit Exchange.
Interim financing / Bridge loans: Temporary financing often required during Reverse and Improvement Exchanges that must be in the name of Amherst or EAT and guaranteed by exchanger
Intent: § 1031 includes a requirement that the intent of the exchanger is to hold purchased property for “long-term” investment.
“Long-term” is not further defined in § 1031
Intermediary: Also referred to as Qualified Intermediary or QI, facilitator, accommodator -- the QI oversees and facilitates all aspects of tax deferred exchanges pursuant to §1031 of the Internal Revenue Code.
Like-kind: Any real property located in the United States that is not a personal residence, a personally used 2nd home or dealer property held for resale
A commercial building is like-kind to a single-family residence; raw land is like-kind to an apartment complex. Like-kind is real property for real property.
Domestic real estate is like-kind to other domestic real property.
Foreign real property is like-kind to other foreign real estate.
A partnership interest is personal property, therefore not like-kind to real property.
Non-qualifying property: Personal property, a personal residence, a personally used 2nd home, dealer property heldfor resale and foreign property if domestic property is sold
Domestic property does not qualify if foreign property was sold.
Purchase price / Adjusted purchase price: For exchange purposes, the gross value of the property purchased is increased by applicable closing costs and referred to as the adjusted purchase price. Exchange proceeds can be utilized to pay qualifying closing costs.
QI / Qualified Intermediary: Also known as the accommodator or facilitator, the QI oversees and facilitates all aspects of tax deferred exchanges.
Qualifying property: Not a personal residence, not a personally used 2nd home, not personal property, not dealer property held for resale, and not foreign property if domestic property is being sold
Realized gain: The difference between the net consideration received from the sale of property and that property’s adjusted basis – but tax is not due and payable on realized gain until it is “recognized”. When an exchange defers 100% of the taxes, there is realized gain, but no recognized gain.
Recognized gain: The portion of realized gain reported for income tax purposes. When realized gain is recognized, i.e. reported on a tax return, it is taxable and the tax is due and payable
Related party: Includes spouses, children, siblings, parents, grandparents, and greater than 50% ownership of a corporation or partnership
Does not include aunts, uncles, cousins, parents-in-law and children-in-law
Relinquished property: Property being sold in a tax deferred exchange
Replacement property: Property being purchased in a tax deferred exchange
Reverse Exchange: Allows taxpayer to purchase replacement property before a buyer is found or can complete the purchase of property to be sold as part of an exchange. A warehousing (or parking) arrangement for either the property to be sold (Exchange First) or the property to be purchased (Exchange Last) can be used to allow the purchase of replacement property to occur prior to the sale of relinquished property.
Safe harbor: A guideline for safe conduct in a particular aspect of the tax code
If you do this your exchange will not be overturned. Think of a safe harbor as a rule.
Sale price / Adjusted sale price: For exchange purposes, the gross value of the property sold is reduced by qualifying closing costs and commissions and referred to as the adjusted sale price.
Starker exchange: The Starker v. Commissioner Case ruled on by the Ninth Circuit Court of Appeals in 1979 set the precedent for delayed exchanges as we know them today. T.J. Starker sold forest land to Crown Zellerbach who held his sale proceeds for several years while Starker selected replacement property, which Crown Zellerbach then purchased on Starker’s behalf. The term “Starker exchange” is synonymous to “delayed exchange” in which there is a period of time, now not to exceed 180 days, between the sale of relinquished property and the purchase of replacement property.
Taxpayer: Often called the “Exchanger” or client, it is the person(s) or entity that owns the asset being sold in an exchange
Vesting: The way title to property is held, i.e. Zachary Travis Evans, a married man as his sole and separate property, or C. Michelle Cake, as Trustee of the Cake Family Trust dated January 23, 1970, or Tarannosaurus von Soxen LLC, a Delaware limited liability company…
States use different vestings so when relinquished property and replacement property are not in the same state, the most similar vesting choice for purchasing replacement property is used.
You’ve earned a dose of tax humor: “The Eiffel Tower is the Empire State Building after taxes.” – Anonymous