§1031 Exchange Terminology

The terms and definitions that follow are for educational purposes only, they are not intended to be a procedural road map to engaging in or completion of a §1031 Exchange.  It is strongly recommended that an investor contact appropriate legal and/or tax experts before initiating and exchange.

BOOT:  Non like-kind property; taxable to the extent there is capital gain.

CASH BOOT:  Any proceeds actually or constructively received by the taxpayer.

CONSTRUCTIVE RECEIPT:  Although an investor does not have actual possession of the proceeds, they are legally entitled to the proceeds in some manner such as having the money held by an entity considered as their agent or by someone having a fiduciary relationship with them.  This creates a taxable event.

DIRECT DEEDING:  Transfer of title directly from the taxpayer to buyer and from the seller to taxpayer after all necessary exchange documents have been executed.

DELAYED EXCHANGE:  A delayed exchange is the most common exchange format.  It provides investors up to 180 days to acquire replacement property through the use of a Qualified Intermediary (QI) to complete a valid delay exchange.

EXCHANGER:  Entity or taxpayer (investor) preforming an exchange.

EXCHANGE AGREEMENT:  The written agreement (employment contract) defining the transfer of the relinquished property, the subsequent receipt of the replacement property, and the restrictions on the exchange proceeds during the exchange period.

EXCHANGE PERIOD:  The period of time defined by the Internal Revenue Code in which replacement property must be received by the taxpayer; ends on the earlier of 180 calendar days after the relinquished property closing or the due date for the taxpayer’s tax return (If the 180th day falls after the due date of the taxpayer’s tax return, an extension potentially may be filed to receive the full 180 day exchange period).

IDENTIFICATION PERIOD:  A maximum of 45 calendar days from the relinquished property closing to identify potential replacement property(ies).

LIKE-KIND PROPERTY:  Any property held for productive use in trade or business or held for investment; both the relinquished and replacement properties must be considered like-kind to qualify for tax deferral.

MORTGAGE BOOT:  This occurs when the taxpayer does not acquire debt that is equal to or greater than the debt that was paid off on the relinquished property sale; referred to as debt relief.  This creates a taxable event.

QUALIFIED INTERMEDIARY:  The entity who facilitates the exchange; defined as follows: (1) Not a related party (i.e. agent, broker, etc.) (2) Receives a fee (3) Receives the relinquished property from the taxpayer and sells to the buyer (4) Purchases the replacement property from the seller and transfers it to the taxpayer.

RELINQUISHED PROPERTY:  Property given up by the taxpayer; also referred to as the sale, exchange, ‘downleg’ or ‘Phase I’ property.

REPLACEMENT PROPERTY:  Property received by the taxpayer; also referred to as the purchase, target, ‘upleg’ or ‘Phase II’ property.

Notice:  Peak Realty Advisors, a professional real estate brokerage affiliates with and recommends experts, each with specialties in associated areas including, qualified intermediary, legal, tax, funding, and escrow, all companies proven to serve as your resources to obtain accurate and thorough information about the entire exchange process.

§1031 Exchange, What is it
§1031 Exchange Basic Statutory Requirements
§1031 Exchange Process Checklist

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