1031 Exchange Dictionary
 

EXCHANGE TYPES

1031 tax exchange
A method by which a real property owner disposes of one property and acquires another without having to pay any capital gains tax on the transaction. In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property. In an exchange, the tax on the exchange may be deferred indefinitely. "Swap till you drop".

Simultaneous Exchange
A Simultaneous Exchange occurs when the relinquished (sale) property and the replacement (acquired) property are transferred concurrently. This is unusual and not necessary.

Delayed Exchange
The delayed exchange is the most universal exchange. The exchanger has time after relinquishing one property to identify and acquire the replacement propertie(s).

Improvement Exchange
The taxpayer can choose to make repairs or add structural improvements as part of the replacement property. While these types of exchanges can be complicated and cumbersome, they can alleviate cash-flow and exchange residual issues.

Reverse Exchange
The replacement property is acquired before the relinquished property is sold. The newly issued Revenue Procedure (REV. Proc.2000-37) provides a safe harbor for reverse and reverse build to suit exchanges entered into on or after September 15, 2000 .

EXCHANGE TERMS

ACTUAL RECEIPT: Physical possession of proceeds.

BOOT: To the extent that investors do not exchange even or up in value, and/or exchange even or up in equity and debt, they will have received non-qualifying property ('boot") in the exchange. If boot is received, tax is computed on the amount of gain on the sale or the amount of boot received.

CASH BOOT: Any proceeds actually or constructively received by the Exchanger.
 
CONSTRUCTIVE RECEIPT: Not a good thing to have. It means that although an investor does not have actual possession of the proceeds, he/she is legally entitled to the proceeds in some manner such as having the money held by an entity considered as his/her agent or by someone having a fiduciary relationship with him/her. This can happen if a 1031 Coordinator is not used, and can create a taxable event.

DIRECT DEEDING: Transfer of title directly from the Exchanger to Buyer and from the Seller to Exchanger after all necessary exchange documents have been executed.

EXCHANGER: Entity or taxpayer performing an exchange.

EXCHANGE AGREEMENT: The written agreement 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 in which replacement property must be received by the Exchanger. Ends on the earlier of 180 calendar days after the relinquished property closing or the due date for the Exchanger's tax return. (If the 180th day falls after the due date of the Exchanger's tax return, an extension may be filed to receive the full 180 day exchange period.)

EXCHANGING UP: To accomplish a fully tax-deferred exchange, the rule of thumb is exchange even or up in value and exchange even or up in equity and in debt. Not necessary, but obviously desirable.

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

LIKE-KIND PROPERTY: Like-kind refers to the type of property being exchanged. Investors can exchange any real estate investment for any other type of real estate investment. For example, vacant land can be exchanged for rental property. In most cases, the investor's personal residence is not like-kind investment property.

MORTGAGE BOOT: This occurs when the Exchanger 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. Requirements:

1. Not a related party (i.e. agent, attorney, broker, etc.)
2. Receives a fee
3. Receives the relinquished property from the Exchanger and sells to the buyer
4. Purchases the replacement property from the seller and transfers it to the Exchanger; Asset Preservation, Inc. (API) is a "Qualified Intermediary."

RELINQUISHED PROPERTY: Property given up by the Exchanger. Also referred to as the sale, exchange, 'downleg' or 'Phase I' property.

REPLACEMENT PROPERTY: Property received by the Exchanger.

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