1031 Exchange Glossary, Definitions and Terms
1031 Exchange – A tax-deferred exchange allowing real estate investors to defer capital gains taxes by reinvesting proceeds into a like-kind property.
180-Day Exchange Period – The maximum time allowed to acquire a replacement property after selling the relinquished property in a 1031 exchange.
45-Day Identification Period – The time frame in which an exchanger must identify potential replacement properties after selling the relinquished property.
Absorption Rate – A metric that measures the rate at which available properties are sold in a specific market during a given period.
Accredited Investor (Individuals) – A person who meets specific income or net worth criteria, allowing them to participate in certain investment opportunities, including Delaware Statutory Trusts (DSTs) in 1031 exchanges.
Accommodator (Qualified Intermediary) – A third-party facilitator who holds the exchange funds and ensures compliance with IRS regulations.
Alternative Minimum Tax (AMT) – A parallel tax system ensuring high-income individuals pay a minimum amount of tax, which can impact real estate investors.
Asset – Any item of value, including real estate, that an investor owns and can use for investment purposes.
Boot – Any cash, mortgage relief, or non-like-kind property received in an exchange, which may be subject to taxation.
Capital Gains Tax – A tax imposed on the profit from the sale of an asset, which can be deferred through a 1031 exchange.
Capitalization Rate (Cap Rate) – A measure of return on a real estate investment, calculated by dividing the property's net operating income by its purchase price.
Charitable Remainder Trust (CRT) – A tax-exempt trust that allows property owners to sell real estate and defer capital gains while receiving income from the trust.
Co-Ownership (CORE) – A real estate ownership structure where multiple investors hold fractional interests in a property, often used in 1031 exchanges.
Concurrent Exchange – A 1031 exchange where the sale of the relinquished property and the purchase of the replacement property occur simultaneously.
Constructive Receipt – A situation where an exchanger has access to exchange funds before the transaction is completed, which can disqualify the exchange.
Delayed Exchange – The most common type of 1031 exchange, where there is a time gap between selling the relinquished property and purchasing the replacement property.
Depreciation Recapture – A tax imposed on the portion of the gain that was previously depreciated, which cannot be deferred in a 1031 exchange.
Exchange Accommodation Titleholder ("EAT") – A third-party entity used in reverse and improvement exchanges to hold title to a property during the exchange process.
Exchange Agreement – A contract between an exchanger and a qualified intermediary outlining the terms and process of the exchange.
Exchange Period – The 180-day period during which the exchanger must complete the purchase of the replacement property.
Exchanger – The investor or taxpayer participating in a 1031 exchange.
Fair Market Value – The price a willing buyer and seller would agree upon for a property in an open market.
Gain Deferral – The primary benefit of a 1031 exchange, allowing investors to postpone paying capital gains taxes.
Identification Rules – IRS regulations specifying how many replacement properties can be identified, such as the Three-Property Rule, 200% Rule, and 95% Rule.
Improvement Exchange (Build-to-Suit Exchange) – A 1031 exchange where improvements are made to the replacement property using exchange funds.
Joint Tenancy – A form of property ownership where two or more individuals hold equal shares with the right of survivorship.
Like-Kind Property – Real estate that qualifies for a 1031 exchange, meaning it must be of the same nature or character, regardless of quality or location.
Mixed Property (Multi-Asset) Exchange – A 1031 exchange involving both real property and personal property, requiring careful tax planning.
Mortgage Boot – The taxable portion of a 1031 exchange that arises when the mortgage liability on the replacement property is less than that on the relinquished property.
Napkin Test – A simple rule of thumb stating that to fully defer taxes, an exchanger must reinvest all proceeds and acquire a property of equal or greater value.
Non-Qualified Property – Property that does not qualify for a 1031 exchange, such as personal residences, stocks, bonds, and inventory.
Partial Exchange – An exchange where an investor takes some cash or other non-like-kind property, resulting in a taxable event.
Qualified Intermediary (QI) – A required third party who facilitates the exchange by holding the proceeds and ensuring compliance with IRS rules.
Realized Gain – The difference between the sale price of a relinquished property and its adjusted basis, which can be deferred in a 1031 exchange.
Recognized Gain – The portion of the gain that is taxable, typically due to receiving boot in an exchange.
Relinquished Property – The original investment property that is sold as part of a 1031 exchange.
Replacement Property – The like-kind property that an investor acquires to complete a 1031 exchange.
Reverse Exchange – A 1031 exchange where the replacement property is purchased before selling the relinquished property.
Riparian Rights – Legal rights of landowners whose property borders a river or stream, impacting water access and usage.
Starker Exchange – Another term for a delayed 1031 exchange, named after a landmark tax court case that validated the delayed exchange structure.
Step-Up in Basis – A tax provision that allows heirs to inherit property at its current fair market value, effectively eliminating deferred capital gains tax.
Three-Property Rule – An IRS identification rule allowing an exchanger to identify up to three potential replacement properties, regardless of their value.
200% Rule – An identification rule allowing an exchanger to identify multiple properties, provided their combined value does not exceed 200% of the relinquished property's value.
95% Rule – A rule stating that an exchanger can identify an unlimited number of properties but must acquire at least 95% of the total identified value.
Water Rights – Legal rights to use water from a source such as a river, stream, or lake, which can impact property value and usage.
