1031 Exchange Glossary

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Welcome to our 1031 Exchange Glossary! Here, you'll find explanations of the key terms commonly used in 1031 exchanges. Whether you're a seasoned investor or new to the process, this glossary will help you navigate the world of tax-deferred exchanges with ease.

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1031 Exchange

 

A tax-deferred exchange that allows investors to sell a property and reinvest the proceeds into a new property of like-kind, deferring the capital gains tax that would typically apply on the sale.

 

Like-Kind Property

 

Property that is of the same nature or character, regardless of quality or grade. In a 1031 exchange, both the property being sold and the property being acquired must be like-kind. Most real estate properties are considered like-kind.

 

Qualified Intermediary (QI)

 

A third-party professional who facilitates the exchange process. This is where Commonwealth1031.com LLC gets involved. As your QI, we will hold your proceeds fom the sale of the relinquished property and transfers them to the new property, ensuring compliance with IRS rules.

 

Relinquished Property

 

The property that is being sold or exchanged in a 1031 exchange. This is the property the investor is giving up to acquire a new one.

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Replacement Property

 

The new property that an investor acquires in a 1031 exchange. This property must be of like-kind to the relinquished property and must be identified within 45 days of the sale of the relinquished property.

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Identification Period

 

The 45-day period, starting from the sale of the relinquished property, in which the investor must identify potential replacement properties. Failure to meet this deadline may disqualify the exchange.

 

Exchange Period

 

The 180-day period, starting from the sale of the relinquished property, during which the investor must complete the acquisition of the replacement property.

 

Boot

 

Any form of non-like-kind property or cash that is received in a 1031 exchange. Boot is subject to taxation, and receiving it can trigger a taxable event.

 

Capital Gains Tax

 

A tax on the profit made from the sale of an asset, such as real estate. In a 1031 exchange, capital gains tax is deferred, not eliminated.

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Depreciation Recapture

 

When a property is sold, the IRS may tax any depreciation that was previously claimed on the property. This can occur in a 1031 exchange if the new property has a lower depreciable basis than the relinquished property.

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Like-Kind Exchange Rules

 

The IRS regulations that govern 1031 exchanges, stating that the properties exchanged must be of a like-kind nature and that strict timelines must be adhered to in order to defer capital gains tax.

 

Reverse 1031 Exchange

 

A type of exchange where the investor acquires the replacement property before selling the relinquished property. This type of exchange involves a more complex process and often requires a qualified intermediary to facilitate the transaction.

 

Delayed 1031 Exchange

 

The most common type of 1031 exchange, where the relinquished property is sold first, and the investor has up to 45 days to identify replacement properties and up to 180 days to complete the acquisition.

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Safe Harbor

 

A provision in 1031 exchange regulations that provides a clear path for meeting the IRS requirements, ensuring the exchange qualifies for tax deferral. Examples include the identification and exchange periods.

 

Exchange Accommodation Titleholder (EAT)

 

A company or trust used in a reverse 1031 exchange to hold title to the replacement property while the investor completes the sale of the relinquished property. This structure ensures compliance with IRS guidelines.

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Constructive Receipt

 

A tax term referring to when an investor is deemed to have "received" funds, even if the funds are not physically in their possession. In a 1031 exchange, constructive receipt can disqualify the transaction if the taxpayer has control over the proceeds from the sale.

 

Qualified Property

 

Any real estate property that qualifies for a 1031 exchange under IRS rules, typically used for business or investment purposes. Primary residences do not qualify.

 

Market Value

 

The estimated amount for which a property should sell on the open market. In the context of a 1031 exchange, the market value helps determine the fair value of the relinquished and replacement properties.

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Primary Residence

 

A property where an individual lives most of the time. Primary residences are generally not eligible for a 1031 exchange, although certain exceptions exist.

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Capital Gains

 

The profit from the sale of an asset such as real estate. A 1031 exchange allows an investor to defer the capital gains tax on the sale of a property as long as they meet the exchange requirements.

 

Investment Property

 

Real estate used for business purposes, such as rental properties or properties used to generate income. Investment properties are eligible for 1031 exchanges, unlike primary residences.

 

Tax-Deferred

 

A tax strategy where taxes on the gains from a transaction (such as a real estate sale) are deferred until a later date, as opposed to paying them at the time of the transaction.

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By understanding these terms, you can better navigate the 1031 exchange process and make informed decisions for your investment property transactions. If you have any further questions or need assistance, don't hesitate to contact us at 781-953-1668 or info@commonwealth1031.com.