GLOSSARY
OF REAL ESTATE
EXCHANGE 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 another 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.
EXCHANGER:
Taxpayer, Client.
GROWTH FACTOR:
Interest earned during the exchange, payable at the end.
RELINQUISHED PROPERTY:
Old property, property being sold by the Exchanger. (Use to be
called the Downleg property, now commonly called Phase I
property).
REPLACEMENT PROPERTY:
New property, property being acquired or the target property
being brought by Exchanger. (Use to be called Upleg property, now
commonly called Phase II property).
SIMULTANEOUS/CONCURRENT:
An exchange without any time span between the sale and buy.
STARKER:
Name of the taxpayer in U.S. Court of Appeal's case which
authorized Delayed Exchanges. The term a "Starker
Exchange" is no longer used to describe a Delayed
Exchange.
LIKE-KIND PROPERTY:
Any real property for any other real property if said
property(ies) are held for productive use in trade or business or
for investment purposes.
SEQUENTIAL DEEDING:
Property is actually deeded to the Intermediary and the
Intermediary deeds to the ultimate owner.
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.
IDENTIFICATION PERIOD:
The replacement property must be identified within 45 days of the
close of escrow/closing 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.
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). Due to the
Taxpayer’s ability to extend the date of payment, the
exchange period is usually 180 days.
CONSTRUCTIVE RECEIPT:
Control of the cash proceeds without actual physical possession
by Exchanger or their agent.
BOOT:
Taxable situation, whether Cash or Mortgage (Debt Relief).
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.
SAFE HARBOR:
Term used to identify the requirements to protect the
Exchanger’s money as well as the "Qualified
Intermediary."
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.
QUALIFIED INTERMEDIARY:
Intermediary is the company who acts as the accommodator in the
exchange. A qualified intermediary is identifed as follows:
1.) Not a related party to the Exchanger, (e.g. agent, attorney,
broker, etc.);
2.) Receives a fee;
3.) Acquires the relinquished property from the Exchanger; and
4.) Acquires the replacement property and transfers it to the
Exchanger.
TAX REFORM ACT OF 1984:
In the Tax Reform Act of 1984, Congress addressed the IRS's
continued displeasure with the Starker decision by amending
Section 1031 to allow Delayed Exchanges; but only if all of the
exchange property is identified and acquired within specific
deadlines (see Exchange Period). And most important in the
Conference Report accompanying the 1984 Act, Congress
specifically reaffirmed that a "sale" followed by
reinvestment in like-kind property does NOT qualify for tax
deferral under Section 1031. So to qualify for tax deferral, it
is still quite essential to carefully structure an exchange to
avoid actual or constructive "receipt" of proceeds of
sale and to prevent characterization of the transaction as a
taxable sale and reinvestment.
1991 REVISIONS:
Basically the IRS held a hearing to try and "clean up"
the Tax Reform Act of 1984 and to provide uniform terminologies,
which are included herein. One of the main results for this
revision is that IRS finally had a change of attitude toward
Delayed Exchanges by accepting them instead of fighting them.
This glossary of information is provided by ASSET PRESERVATION, INC., A QUALIFIED INTERMEDIARY, and JAMES A. SMITH.
For information, suggestions or questions,
contact:
jim@1031invest.com
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