1031 Exchange: Glossary and FAQs

1031 Exchange

The tax deferred sale and purchase of properties that are like-kind for the benefit of deferred gain treatment. A 1031 Tax Deferral permits taxpayers to reinvest the proceeds from the sale of property held for investment or business purposes into another investment or business property, and defer capital gains tax that would otherwise be due on the initial sale.

Adjusted Basis

The method of measuring your investment in property for tax purposes. This figure is calculated by taking the original basis and adding improvement costs minus the depreciation of the property.

Boot

Cash or mortgage relief received in an exchange, the result of which is a taxable gain. Cash or mortgage relief the taxpayer receives in the exchange which does not qualify as “like-kind property”. The Boot is a taxable gain.

Constructive Receipt

The ability of the investor (exchanger) to exercise control over the proceeds or exchange equity resulting from the transfer of the relinquished property. Constructive receipt will invalidate a tax deferred exchange.

Directed Deed

A term meaning the vested owner deeds directly over to the ultimate owner.

Exchange Equity

The cash and/or other property available at the time of closing on the sale of the relinquished property.

Exchange Period

The 180 day period in which the exchanger must complete their 1031 exchange by acquiring title to the replacement property. The 180-day period begins on the day title transfers on the relinquished property.

Exchanger

The owner of the investment property intending to defer the taxable gain on the exchange of investment property.

Identification Period

During this 45-day period, the exchanger must identify the replacement property in order to continue with the section 1031 exchange transaction. The identification period starts on the day title transfers on the relinquished property.

Like-Kind

The properties being exchanged must be of the same asset class. Like kind is defined in the tax code as meaning similar in nature or character, notwithstanding differences in quality or grade. Like-kind real estate property is basically any real estate that isn’t your personal residence or a second home.

Relinquished Property

Investment property sold by the taxpayer when making an exchange.

Replacement Property

Investment property acquired as part of an exchange.

Safe Harbor

Term used to identify the requirements to protect the exchanger’s money as well as the "Qualified Intermediary."

Settlement Agent

A term referring to Title agent, closing officer, escrow officer, settlement officer, closing agent, closing attorney or settlement attorney.

"Starker Exchange"

A term used to describe delayed, non-simultaneous, exchanges. The name stems from the 1979 U.S. Court of Appeal's case (Starker vs. United States) which authorized Delayed Exchanges.

Tax Deferred Exchange

Also known Starker exchanges, delayed exchanges, like-kind exchanges, 1031 exchanges, section 1031 exchanges, tax-free exchanges, nontaxable exchanges, real estate exchanges, real property exchanges.

Tenancy In Common (TIC)

A fractional ownership interest in a piece of property, rather than owning the entire piece of property.