1031 Exchange Alternatives - Tenant-In-Common Glossary

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Glossary:

Actual Receipt - occurs when the taxpayer actually receives the sale proceeds. Normal Occuring Radioactive Material; can cause environmental concerns.
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Basis and Adjusted Basis - "Basis" is the cost basis of the property. "Adjusted Basis" is calculated by adding improvements made to the original purchase price and then subtracting the depreciation taken. This "adjusted basis" is used to determine the capital gain in a particular transaction. [top of page]

Boot - "Non like-kind" property the taxpayer may receive as part of an exchange. "Boot" is taxable to the extent there is a capital gain. "Cash boot" represents proceeds actually or constructively received by the taxpayer. "Mortgage boot" (also referred to as debt relief) is a reduction in the taxpayer's mortgage liabilities on a replacement property. "Mortgage boot" occurs when the taxpayer does not acquire debt that is equal to or greater than the debt that was paid off on the relinquished property sale and creates a taxable event. All Boots are taxable. [top of page]

Constructive Receipt - Although a taxpayer does not have actual possession of the proceeds, if the taxpayer is legally entitled to the proceeds in some manner, such as having the money held by an entity considered as their agent or by someone having a fiduciary relationship with the taxpayer, this creates a taxable event. This is in contrast with "actual receipt" which is when the taxpayer actually receives the sale proceeds. Constructive Receipt will invalidate an exchange. [top of page]

Direct Deeding - The direct transfer of title from the taxpayer to the buyer or seller directly to the taxpayer. The Regulations provide for direct deeding if the taxpayer has executed an assignment of their purchase and sale agreement to the Qualified Intermediary and if the other party to the transaction (buyer in the sale of the relinquished property or seller in the purchase of replacement property) is made aware of this assignment of the purchase and sale agreement in writing prior to the transferring title.[top of page]

Equity - The proceeds from the sale of a property. [top of page]

Exchange Agreement - A written agreement between the taxpayer and the Qualified Intermediary which outlines the Qualified Intermediary's obligation to transfer the relinquished property to the buyer and the replacement property to the taxpayer, subject to the restrictions specified in the tax code and Treasury Regulations. The agreement must limit the taxpayer's right to receive, pledge, borrow or otherwise obtain benefits of the money or other property before the end of the exchange period.
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Exchange Period - The exchange period begins on the date the relinquished property is transferred to the buyer and ends by the earliest of either: 180 calendar days after closing on the sale of the relinquished property or the due date for filing the tax return for the year which the relinquished property was sold (unless an automatic filing-extension has been obtained).
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Exchanger - The owner of the investment property looking to make an exchange.
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Fair Market Value - The likely selling price as defined by the market at a specific point in time. [top of page]

Identification Period - The time period that begins upon the close of escrow of the relinquished property. During this 45-day period, the Exchanger must identify the replacement property. [top of page]

Like-Kind Property - Any property held for productive use in a trade or business exchanged for any other property held for productive use in a trade or business. Real property that qualifies for a 1031 exchange must be "held for productive use in a trade or business or for investment." Both the relinquished and replacement properties must be considered "like-kind" to qualify for tax deferral. IRC Section 1031 does not limit "like-kind" property to certain types of real estate. The term refers to the nature or character of the property, rather than its grade or quality. Real property must be exchanged for "like-kind" real property. "The fact that any real estate involved is improved or unimproved is not material, for that fact relates only to the grade or quality of the property and not to its kind or class. Unproductive real estate held by one other than a dealer for future use or future realization of the increment in value is held for investment and primarily for sale." Real Property is not considered "like-kind" to personal property.
Examples of real property exchanges include:

Unimproved for improved property
Vacant land for a Commercial building
Duplex for a commercial property
Single family rental for an apartment
Industrial property for a rental property [top of page]

Original Basis - The purchase price of a property. It is used to calculate capital gains or losses for tax purposes. [top of page]

Phase I - The process in which the relinquished property is sold and all respective paperwork for that process are done. This process is also known as the "down-leg" of the exchange process.[top of page]

Phase II - The process in which the replacement property is bought and all the respective paperwork for that process are done. This process is also known as the "up-leg" of the exchange process. [top of page]

Qualified Intermediary - The entity who facilitates the exchange, referred to in the 1991 Treasury Regulations as a "Qualified Intermediary" and defined as follows:

not a related party (i.e. agent, attorney, broker etc.)
receives a fee
receives the relinquished property from the taxpayer and sells to the buyer purchases the replacement property from the seller and transfers it to the taxpayer

An attorney may not act as the taxpayer's Qualified Intermediary if the attorney has performed legal services for the taxpayer within the two-year period ending on the date of the transfer of the first relinquished property, unless these services were solely with respect to a §1031 tax deferred exchange. Reg. §1.1031(b)-2(a) provides a definition of a "disqualified person" for the purposes of a deferred exchange.

A disqualified person is the agent of the taxpayer at the time of the transaction. A person who has acted as the taxpayer's employee, attorney, accountant, investment banker or broker or real estate agent or broker within the two-year period ending on the date of the transfer of the first relinquished properties is treated as an agent of the taxpayer at the time of the transaction.

Qualified Intermediaries are sometimes referred to as the "facilitator," or an" accommodator."[top of page]

Relinquished Property - The property being relinquished from the taxpayer to the buyer.[top of page]

Replacement Property - The property being acquired by the taxpayer from a seller.
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Realized vs. Recognized Gain - The realized gain is the taxpayer's actual capital gain in the property. The recognized gain is the portion of the realized gain that must be recognized in a tax year. In a fully deferred exchange, there is no recognized gain and the realized gain is carried over into the new replacement property.
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Sequential Deeding - Transfer of title from either the taxpayer or seller to the Qualified Intermediary first, followed by a transfer of title from the Qualified Intermediary to the buyer or taxpayer . Although sequential deeding can be used in a delayed exchange, it is most often seen in "parking arrangement" transactions.
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