1031 tax deferred terminology

1031 Tax Deferred Exchange: A deferred Exchange is defined as an exchange in which, pursuant to an agreement, the taxpayer transfers property held either for productive use in a trade or business or for investment, and subsequently receives property to be held either for productive use in a trade or business or for investment.

Basis: Method of measuring investment in property for tax purposes.  Example: Original cost, plus improvements, minus depreciation taken.

Boot:  Taxable situation, whether cash or mortgage.

Constructive Receipt: Control of the cash proceeds without actual physical possession by Exchanger or the Exchanger's agent.  Not allowed in an exchange.

Deferred Exchange: This term is now used in place of "Non-Simultaneous Exchange" or "Starker Exchange".  This is the type of an exchange where the Exchanger utilizes the exchange period described above.

Direct Deeding: Vested owner deeds directly to the ultimate owner.   Does not eliminate the duties of the Qualified Intermediary to acquire and transfer the relinquished property and acquire and transfer the replacement property.

Exchanger: Taxpayer, Client.

Exchange Agreement: A Deferred Exchange is defined as an exchange in which, PURSUANT TO AN AGREEMENT, the Exchanger transfers the relinquished property and subsequently receives the replacement property. THEREFORE, AN EXCHANGE AGREEMENT IS VITAL.

Exchange Period: The replacement property must be received by the taxpayer within the "exchange period", which ends on the earlier of 180 days after the date on which the taxpayer transferred the property relinquished OR the due date for the taxpayer's tax return for the taxable year in which the transfer of the relinquished property occurs (such as April 15th).  Because the Taxpayer is able to extend the due date of the tax return, the exchange period is usually 180 days.

Growth Factor: Interest earned on the exchange equity which can only be paid at the time the exchange is completed.

Identification Period: The replacement property must be identified within 45 days of the close of the relinquished property.  This 45 day rule is very strict and is not extended if the 45th day should happen to fall on a weekend or a legal holiday.

Like-Kind Property: Any real property, other than an individual's primary residence, which is used in productive trade or business is held for investment.  Personal property also requires that both the relinquished and replacement properties fall under the same standard Industry Code. (SIC)

Qualified Intermediary: One of the Safe Harbors.  Intermediary is the company who acts as the accommodator in the exchange.  A qualified intermediary is identified as follows: 1---Not a related party (e.g. agent, attorney, broker, etc.); 2---Receives as a fee; 3---Acquires the right to convey the relinquished property from the Exchanger and; 4---Acquires the right to receive replacement property and transfers it to the Exchanger.

Relinquished Property: Property being sold by the Exchanger. (Once called the Downleg property, the old property, now commonly called Phase 1 property.)

Replacement Property: Property being acquired or the target property being purchased by Exchanger.  (Once called Unleg property, new property, now commonly called Phase 2 property).

Safe Harbor: The 1991 amendments to the Code established four (4) Safe Harbors. When these Safe Harbors are incorporated into the exchange, it is determined that the taxpayer is not in receipt of money or other property.

Sequential Deeding: Property is actually deeded to the accommodate and the accommodator deeds to the ultimate owner.  Not necessary when a qualified Intermediary is used.

Simultaneous Concurrent: An exchange where the replacement property is received immediately after the disposition of the relinquished property.

Starker: Name of the taxpayer in court case which authorized a delayed exchange.  The term a "Starker Exchange" is no longer used to describe a Delayed Exchange.

1031 Information

What is a 1031 Tax Deferred Exchange?

IRS 1031 Home Page

Related Information

Tax Relief Act of 2003

How Does the Tax Relief Act Apply to Real Estate?

Hire an Investment Team

We are not providing legal, financial or invesment advice.  We suggest you contact a professional regarding your investment strategy.