1031 Exchange
The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Accommodator                                                                                                             
An unrelated party who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Exchanger’s relinquished property and the acquisition of the Exchanger’s replacement property. The Accommodator is technically referred to as the Qualified Intermediary.

Actual Receipt
Direct access to your exchange funds or other property. Receiving exchange funds during the exchange period will disqualify your exchange.

Adjusted Cost Basis
The original basis plus improvement costs minus the depreciation of the property.

After-Tax Return
The return from an investment after the tax liabilities have been factored in.

Agent
An entity that acts on behalf of the taxpayer. A Qualified Intermediary cannot be your agent at the time of or during a tax-deferred, like-kind exchange. For 1031 Exchange purposes, an agent includes your employee, attorney, accountant or investment banker or real estate agent or broker within the two-year period prior to the transfer of your first relinquished property. An agency relationship does not exist with entities that offer Section 1031 Exchange services or routine title, escrow, trust or financial services.

Basis
The original purchase price or cost of your property plus any out-of-pocket expenses such as brokerage commissions, escrow costs, title insurance premiums, sales tax (if personal property) and other closing costs directly related to the acquisition.

Boot
Property which is received in an exchange and that is not (like-kind) as to other property acquired in an exchange transaction and is defined as the “fair market value” of the non-qualified property received in an exchange.  While the receipt of boot will not disqualify the exchange, an Exchangor who receives boot in an exchange transaction generally recognizes gain (taxable) to the extent of the value of the boot received.

See also Mortgage Boot.

Build-To-Suit Exchange
A tax-deferred, like-kind exchange whereby the Qualified Intermediary acquires title and holds title to the replacement property on behalf of the Exchangor, during which time structures or improvements are constructed or installed on or within the replacement property. Also known as an Improvement Exchange.

Capital Gain
Capital gain is calculated as follows: total selling price of the relinquished property, less exchange expenses, less the relinquished property’s adjusted basis. The adjusted basis is the original cost, plus the cost of capital improvements, less depreciation or cost recovery deductions. Capital gains may be subject to depreciation recapture and other rules of the IRS.

Capital Gain Tax
Tax levied by Federal and state governments on investments that are held for one year or more. Investments may include real estate, stocks, bonds, collectibles and tangible depreciable personal property.

Capital Improvements
For land or buildings, improvements (also known as capital improvements) are the expenses of permanently upgrading your property rather than maintaining or repairing it. Instead of taking a deduction for the cost of improvements in the year paid, you add the cost of the improvements to the basis of the property.

Cash Equivalents
Short-term investments, such as U.S. Treasury securities, certificates of deposit, and money market fund shares, which can easily be liquidated into cash.

Community Property
All property acquired by a husband and wife during their marriage. Each spouse has a right to an equal interest in the property. Gifts and inheritances received by an individual spouse during the marriage are treated as separate property. Property acquired by the spouse prior to marriage, property acquired with separate property or rents or profits generated from separate property are treated as separate property. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states.

Constructive Receipt
Exercising control over your exchange funds or other property. Control over your exchange funds includes having money or property from the exchange credited to your bank account or property or funds reserved for you. Being in constructive receipt of exchange funds or property may result in the disallowance of the tax-deferred, like-kind exchange transaction thereby creating a taxable sale.

Cooperation Clause
Language to be included in a Purchase and Sale Contract for both relinquished and replacement properties that indicates and discloses that the transaction is part of an intended tax-deferred, like-kind exchange transaction and requires that all parties cooperate in completing said exchange.

Deduction
An amount that can be subtracted from gross income or a gift, lowering the amount on which tax is assessed.

Deferred Exchange
The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Delayed Exchange
A tax-deferred, like-kind exchange where there is a delay or period of time between the close and transfer of the Exchangor’s relinquished property and replacement property.

Direct Deeding
A practice authorized by Treasury Revenue Ruling 90-34 whereby either the relinquished property or the replacement property can be deeded directly from seller to buyer without deeding the property to the Qualified Intermediary.

Disposition
The sale or other disposal of property that causes a gain or a loss including like-kind exchanges and involuntary conversions.

Equity
The value of a person’s ownership in real property or securities; the market value of a property or business, less any claims or liens on it.

Exchange
The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Exchange Agreement
A written agreement between the Qualified Intermediary and Exchangor setting forth the Exchangor’s intent to exchange relinquished property for replacement property, as well as the terms, conditions and responsibilities of each party pursuant to the tax-deferred, like-kind exchange transaction.

Exchange Period
The period of time during which the Exchangor must complete the acquisition of the replacement property (ies) in his or her tax-deferred, like-kind exchange transaction. The exchange period is 180 calendar days from the date the Exchangor transfers the first relinquished property, or the due date (including extensions) of the Exchangor’s income tax return for the year in which the tax-deferred, like-kind exchange transaction took place, whichever is earlier, and is not extended due to holidays or weekends.

Exchange Rules
The Exchangor must use one of these rules when identifying replacement property

Exchangor
The Taxpayer who is completing the tax-deferred, like-kind exchange transaction. An Exchangor may be an individual, partnership, LLC, corporation, institution or business.

Excluded Property
The rules for like-kind exchanges do not apply to property held for personal use (such as homes, boats or cars); cash; stock in trade or other property held primarily for sale (such as inventories, raw materials and real estate held by dealers); stocks, bonds, notes or other securities or evidences of indebtedness (such as accounts receivable); partnership interests; certificates of trust or beneficial interest.

Fair Market Value
The price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.

Identification Period
The period of time during which the Exchangor must identify potential replacement properties in his or her tax-deferred, like-kind exchange. The period is 45 calendar days from the transfer of the Exchangor’s relinquished property and is not extended due to holidays or weekends.

Improvements
For land or buildings, capital improvements are the expenses of permanently upgrading your property rather than maintaining or repairing it. Instead of taking a deduction for the cost of improvements in the year paid, you add the cost of the improvements to the basis of the property. If the property you improved is a building that is being depreciated, you must depreciate the improvements over the same useful life as the building.

Intermediary
An unrelated party who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Exchangor’s relinquished property and the acquisition of the Exchangor’s replacement property. The Intermediary is technically referred to as the Qualified Intermediary, but is also known as an Accommodator or Facilitator.

Like-Kind Exchange
The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Mortgage Boot
When you assume debt on your replacement property that is less than the debt on your relinquished property, you receive mortgage boot or mortgage relief. Generally speaking, mortgage boot received triggers the recognition of gain and is taxable, unless offset by cash boot added or given up in the exchange. 

Multiple Property Exchange
Disposition and/or acquisition of more than one property in a Section 1031 Exchange.

Partial Exchange
When an exchange entails receiving cash, excluded property, non-like-kind property or any net reduction in debt (mortgage relief) on the replacement property as well as an exchange of qualified, like-kind property. In the case of a partial exchange, tax liability would be incurred on the non-qualifying portion and capital gain deferred on the qualifying portion under Section 1031.

Personal Property
Any property belonging to the exchanger that is non-real estate related.

Qualified Intermediary
An unrelated party who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Exchanger’s relinquished property and the acquisition of the Exchanger’s replacement property.  The use of a Qualified Intermediary, as an independent party to facilitate a tax-deferred exchange, is a safe harbor established by US Treasury Regulations.  Sometimes QI’s are referred to as “accommodators” or “exchange facilitators.”

Qualified Use
An Exchangor must intend to use the property in their trade or business, to hold the property for investment or to hold the property for income production in order to satisfy the qualified use test.

Real Property
Land and buildings (improvements), including but not limited to homes, apartment buildings, shopping centers, commercial buildings, factories, condominiums, leases of 30-years or more, quarries and oil fields. All types of real property are exchangeable for all other types of real property. In general, state law determines what constitutes Real Property.

Real Property Exchange
The sale or disposition of real estate (relinquished property) and the acquisition of like-kind real estate (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code in order to defer Federal  and in most cases state, capital gain and depreciation recapture taxes.

Related Person
Any person bearing a relationship to the Exchangor as described in Section 267(b) of the Internal Revenue Code. Related parties include family members (spouses, children, siblings, parents or grandparents but not aunts, uncles, cousins or ex-spouses) and a corporation in which you have more than a 50% ownership; or a partnership or two partnership in which you directly or indirectly own more a 50% share of the capital or profits.

Relinquished Property
The property to be sold or disposed of by the Exchangor in the tax-deferred, like-kind exchange transaction.

Replacement Property
The like-kind property to be acquired or received by the Exchangor in the tax-deferred, like-kind exchange transaction.

Reverse Exchange
A tax-deferred, like-kind exchange transaction whereby the replacement property is acquired first and the disposition of the relinquished property occurs at a later date.

Safe Harbors
The Treasury Regulations provide certain Safe Harbors that assist Qualified Intermediaries and Exchangors in structuring tax-deferred, like-kind exchange transactions so they can be assured that no constructive receipt issues will be encountered during the exchange cycle.

Simultaneous Exchange
A tax-deferred, like-kind exchange transaction whereby the disposition of the relinquished property and the acquisition of the replacement property close or transfer at the same time.

Starker Exchange
Another common name for the tax-deferred, like-kind exchange transaction based on a court decision that was handed down (Starker vs. Commissioner) in 1979. The Ninth Circuit Court of Appeals eventually agreed with Starker that it’s delayed tax-deferred; like-kind exchange transaction did in fact constitute a valid exchange pursuant to Section 1031 of the Internal Revenue Code. This ruling set the precedent for our current day delayed exchange structures.

Tax-Deferral
The postponement of taxes to a later year, usually by recognizing income or a gain at a later time. Tax-deferred, like-kind exchange transactions are a common method of deferring capital gain and depreciation recapture taxes.

Tax-Deferred Exchange
The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Taxpayer
The person or entity that is completing the tax-deferred, like-kind exchange transaction, commonly referred to as Exchangor.

Titleholder
The entity that owns/holds title to property.  In an INTERNAL REVENUE CODE Section 1031 Exchange, the titleholder of the relinquished property must be the same as the titleholder of the replacement property. If a taxpayer dies prior to the acquisition of the replacement property, his or her estate may complete the exchange.