We are working on building a complete glossary of exchange terms. Some of these have definitions elsewhere in the site and links will be provided to those pages. Also, each quarter, we define a few exchange terms in our newsletter. Those terms that have been included in our newsletter will have a link to that article for a more thorough definition. If you need more information on any of these terms, please contact our office at 1-800-909-1031 or info@summit1031.com.
If you can't find the term you are looking for in the list below, E-mail us! We'll e-mail back a definition and also add the term you suggest to this page so others can benefit...
Accommodator
A professional who facilitates 1031 exchange transactions. Also called a "Qualified Intermediary (QI)" or "Facilitator". More detail...
Adjusted Basis
The original cost of a property, plus the value of improvements, minus any depreciation taken. See "Basis" definition in Newsletter Article
Basis
The value assigned to a taxpayer’s investment in a property used to compute gain or loss. Definition in Newsletter Article
Boot
Also called "taxable boot", this is money or property that is returned to the taxpayer or is not eligible for exchange due to like-kind property rules. Boot is taxable. See the newsletter article for more details...
Build to Suit Exchange
Also called a "Construction Exchange" or an "Improvement Exchange", allows taxpayer to build their replacement property. More detail...
CES
An abbreviation for "Certified Exchange Specialist", a designation available through the Federation of Exchange Accommodators (FEA) since 2003. To obtain the designation, exchange professionals with at least 3 years of exchange industry experience must pass a comprehensive exam to measure their knowledge on facilitating exchange transactions. After receiving the designation, they must maintain their knowledge through continuing education courses and renew their CES designation every 2 years. For more details on the CES designation, see the FEA page in this site or visit the Federation of Exchange Accommodators website.
Capital Gain
Increased capital in business or investment property through appreciation. The difference between the selling price and the adjusted basis of a property. This gain is taxed at 15% by the Federal government. See newsletter article definition of "gain" for more detail...
Construction Exchange
Allows the taxpayer to build their replacement property. Also called a "Build to Suit Exchange" or an "Improvement Exchange". More detail...
Court Case
Court cases represent the Courts interpretation of the tax law and rulings established in a court case are binding to the taxpayer. Court cases have impact on changes to the law. A good example of a significant court case related to 1031 exchanges is the Starker Case.
Delayed Exchange
Considered the "Normal" type of exchange. Also called a "Forward Exchange".
More detail...
Depreciation
Assumption that as property ages, it loses value. Depreciation is used as a tax deduction on business or investment property. Different types of property are allowed different amounts of depreciation each year, called the depreciation schedule. If a property is depreciated to a value below it's actual market value, depreciation recapture tax will be due on the difference. Depreciation recapture tax is 25%. See Newsletter article for more detail...
Depreciation Recapture
Tax deductions can be taken as a property depreciates. If the property is sold at a higher value than it's depreciation deductions would show, depreciation recapture tax is due on the difference at 25%. See Newsletter article for more detail...
EAT
Abbreviation for "Exchange Accommodation Titleholder" which is basically the IRS's official term for a special purpose entity (or SPE) that buys and holds a property for the taxpayer in a reverse exchange. Read more about Reverse Exchanges on this site...
Exchange Agreement
A document prepared at the beginning of an exchange outlining all the understandings between the taxpayer and the Qualified Intermediary. This document must be signed by the taxpayer before the exchange can begin.
FEA
Abbreviation for the "Federation of Exchange Accommodators", the professional organization for the exchange industry. You can learn more about the FEA on this site or at www.1031.org.
Facilitator
A professional who facilitates 1031 exchange transactions. Also called a "Qualified Intermediary (QI)" or "Accommodator". More detail...
Form 8824
To report a 1031 exchange Form 8824 must be completed as a part of your federal tax return The form reports your realized gain, recognized gain, your new basis, the date you sold your relinquished property, and the dates you identified and acquired your replacement property. Form 8824 is actually a supporting form for IRS Form 4797.
Forward Exchange
Another term for a "Delayed Exchange", which is the "Normal" type of exchange.
More detail...
Gain
In simple terms, Gain is the amount of appreciation your property has earned since being purchased (plus the amount of any depreciation previously taken). See newsletter for more details...
Identification
The act of describing potential replacement properties in writing as a part of a 1031 exchange. Identification must be completed within 45 days of the sale of your relinquished property. There are guidelines for properly identifying property, see the Identification page in this site for more details...
Improvement Exchange
Also called a "Construction Exchange" or a "Build-To-Suit Exchange", allows taxpayer to build their replacement property. More detail...
Internal Revenue Code
This is the tax law that was established by congress. It is written in general terms, so much can be left up to interpretation (See definitions for Revenue Ruling, Private Letter Ruling, and Court Cases). However, some items which are explicitly outlined in the code must be followed as they re written. Examples in Section 1031 include the 45 and 180 day deadlines and like-kind definitions.
Intent
For a property to qualify for an exchange, the taxpayer must prove their intent was to hold the property for business or investment purposes. There is no definitive rules on how intent can be defined, so the taxpayer bears the burden of proof if their intent is called into question.
LLC
An abbreviation for "Limited Liability Company" and LLC is the most commonly used ownership entity for real estate. Qualified Intermediaries typically use LLCs as "Special Purpose Entities" to "park" property in an exchange. An LLC must file a tax return each year, and has a pass-through tax structure. See Reverse Exchange section in this site for more information...
Leasehold Construction Exchange
allows the taxpayer to build replacement property on land they already own. More detail...
Like Kind
In 1031 exchanges, money from the sale of property must be reinvested in property that is deemed to be the same type as the property sold. This is called "like kind property". Nearly all real estate is like-kind, while determining like-kind status for different types of personal property is more restrictive. More detail...
Net Sales Price
The net sales price is the gross sales price of your property less commissions and fees.
Phase 1
The first part of the exchange process. In a forward or delayed exchange Phase 1 typically ends when all the relinquished properties have closed. In a reverse exchange, Phase 1 typically ends when the replacement property is parked.
Phase 2
The second part of the exchange process, commencing after the relinquished property is closed. This stage includes replacement property identification and the purchase of the replacement property. In a reverse exchange, Phase 2 begins after the replacement property is parked and ends after the relinquished property is sold and the replacement property is transferred to the exchanger.
Private Letter Ruling
Represents the IRS's view on a specific transaction, a private letter ruling is an informational statement by the IRS interpreting how a statute or administrative rule applies to a particular set of facts or circumstances. Typically addresses a situation specific to a particular taxpayer and is generally not binding, as it is merely giving guidance on the IRS's current position. Taxpayers can refer to private letter rulings issued to other taxpayers to determine how their situation, if similar, may be interpreted by the IRS. However, a specific private letter ruling does not mean the IRS will rule the same way in a future similar situation -- For instance if significant time has passed since the original ruling and laws or circumstances may have changed during that time. However, a private letter ruling for a set of circumstances does offer a platform for argument if a future case is questioned. Some 1031 strategies are based on private letter rulings and any associated risk. Although a taxpayer is ultimately responsible for the decision to pursue a specific tax strategy, the qualified intermediary should inform them of associated risks.
QEAA
Abbreviation for Qualified Exchange Accommodation Agreement, a document completed in order to qualify a Reverse Exchange for safe harbor treatment. For more information, see the page on Reverse Exchanges in this site...
Qualified Intermediary
A professional who facilitates 1031 exchange transactions. Typically abbreviated "QI". Also called a "facilitator or "accommodator". More detail...
REIT
Abbreviation for Real Estate Investment Trust, REITs are companies that buy, sell, manage and develop real estate by combining the assets of many people similar to a mutual fund. A share of the income generated form the property owned in the REIT is then paid out to all the investors. In the past REITs have not enjoyed a great reputation because the returns were somewhat bland, especially during the 1980's. REITs are currently gaining new popularity as returns are now touted at 6-8%. The popularity of REITs is especially apparent in Asia. However, a newer, more popular joint investment strategy has emerged, called a Tenant in Common Property, or TIC. Read more about TIC's on this site...
Realized Gain
Difference between the total value received for a property and the adjusted basis.
Recognized Gain
Portion of the realized gain, which is ultimately taxable. Not all realized gain is ultimately determined to be taxable and issues, such as boot, can affect how and when gain is recognized.
Relinquished Property
Property the Exchanger owns and wants to sell in a 1031 Exchange.
Replacement Property
Property the Exchanger wants to acquire to complete a 1031 Exchange.
Revenue Ruling
The IRS's published opinion that indicates how they might rule on future situations with similar circumstances. Although IRS opinion is not law, the revenue ruling has the force of law unless or until the federal tax court (or a newer revenue ruling) replaces it. Revenue rulings can be challenged by a taxpayer.
Reverse Exchange
Allows the taxpayer to purchase their replacement property before selling their relinquished property. More detail...
SPE
An abbreviation for "Special Purpose Entity", an SPE is typically an LLC set up for the "special purpose" of buying and holding property in an exchange on a temporary basis. The IRS calls the SPE an "Exchange Accommodation Title Holder" (EAT) for purposes of a Safe Harbor Reverse Exchange. See page on Reverse Exchanges on this site.
Simultaneous Exchange
When properties are swapped with the other party at the same time. This is the way exchanges used to be done before the Starker Case changed everything to allow delayed exchanges. More detail | Definition in Newsletter article
TIC
An abbreviation for Tenant in Common, which is a property that is jointly owned by up to 35 people and managed by a sponsor. Most TICs are classified as securities, and have to meet a set of guidelines to be recognized as real estate for an exchange rather than a partnership (partnership interests are not like-kind to real estate). TIC's are popular investments that can serve as replacement property in an exchange. They can offer good returns with no management hassles. Definition in Newsletter | More details
Undivided Interest
When two or more owners of a property own individually deeded portions of the property. This is different from a partnership where the owners are all on the same deed and own the property together. "Tenant in Common" properties, abbreviated "TIC" are set up as undivided interests. Read more about TICs on this site...
Can't find the term you are looking for? E-mail us to get a definition, we'll e-mail back a definition and also add the term you suggest to this page...