Rules and Definitions
1031 Tax-Exchange Glossary:
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
1031 Exchange: Internal Revenue Code Section 1031, provides that no gain or loss shall be recognized if property held for investment or for productive use in a trade or business is exchange for like-kind property held for investment or for use in a trade or business.
1031 Exchange Forms: The documents used in a typical 1031 exchange are: (1) Standard Like-Kind Exchange Agreement; (2) Identification of Replacement Property; (3) Assignment of Relinquished Property Contract; (4) Notice of Assignment of Assignment of Relinquished Property Contract; (5) Assignment of Replacement Property Contract; (6) A Notice of Assignment of Assignment of Replacement Property Contract. Also in a reverse exchange, the documentation may include: (1) Qualified Exchange Accommodation Agreement ("QEAA"); (2) Designation or Identification of Relinquished Property. Your Qualified Intermediary will typically prepare and provide the appropriate documentation for you as a part of your exchange.
1031 Exchange Requirements: A 1031 tax-deferred exchange is an approved technique for selling property that has been used for investment or use in a trade or business, and purchasing another like-kind property of greater or equal value without having to pay capital gains taxes. Section 1031 of the Internal Revenue Code states that no gain or loss shall be recognized on the exchange of property that is held for productive use in a trade or business, or for investment purposes (i.e. qualified purpose) if it is exchanged for like kind property that is also held for productive use in a trade or business, or for investment purposes (i.e. qualified purpose).
1031 Properties: Properties that are either disposed of as relinquished property or more typically, replacement-properties that are received to complete a 1031 tax deferred exchange.
1031 Rule: Under Section 1031 of the Internal Revenue Code, persons owning property held for investment or for use in a trade or business can use the proceeds through a qualified intermediary to acquire new property that must also be held for investment or for use in their trade or business. If the transactions are documented and conducted properly as an exchange under Section 1031, the tax payable on any gain from the sale of the property can be indefinitely deferred. Section 1031 provides for the non recognition of gain.
1031 Starker Exchange: The landmark legal decision of T.J. Starker v. U.S., 602 F. 2d 1341 (9th Cir. 1979) was significant in the development of the 1031 tax exchange rules. In this case the Ninth Circuit Court held that non simultaneous 1031 exchanges were permissible and set the precedent for the current 180 day non-simultaneous, delayed tax-deferred like-kind exchange transactions.
1031 TIC: Tenants in Common (or TIC) is a way to hold legal title to property with other co-owners. In legal terms, each co-owner has a distinct title to an undivided-fraction of the whole property. This type of ownership is often referred to as TIC ownership. One advantage of this type of ownership is that upon death, each co-owner can leave his or her distinct fractional-ownership interest to their heirs or successor of their choosing instead of to the other co-owners.
1031
Transfer: A transfer of property as part of a tax-deferred exchange
transaction involving property held for trade, business, or investment . See
also
Deferred Exchange which is closely related.
3 Property Rule: Exchangor may identify three or fewer replacement properties.
The most common identification rule utilized.
200% Rule:
Exchangor may identify any number of replacements; however, the total value of
those properties identified may not exceed 200% of the value of Exchangor's
relinquished property.
95% Rule:
Exchangor may identify any number of replacements as long as Exchangor receives
at least 95% of the value of all properties identified.
Note: This rule is not used very often.
Adjusted basis is calculated as follows:
Cost Basis
+ Purchase costs (title & escrow fees, broker commissions, shipping, sales tax, etc.)
+ Improvements (rehabilitation expenses & substantial repairs)
+ Legal fees (to defend or to perfect title to the property, zoning costs, etc.)
+ Selling costs (title & escrow fees, broker commissions, shipping, transfer fees, etc.)
- Accumulated depreciation, depletion, or amortization
- Casualty or theft Loss
- Other decreases to basis
= Adjusted Basis
Boot:
Any non like-kind property received by Exchangor during the exchange.
Build To Suit Exchange: A
Build to Suit Exchange (construction improvement exchange) is when the
Exchangor wants to construct improvements on the replacement property before the
title to the property is transferred to them. The general rule is that you can
not construct improvements on property that you already own. Once the Exchangor
has title to the replacement property, additional improvements or materials
delivered but not constructed are ineligible for
1031 tax deferral. Bloomington
Coca-Cola Bottling Co. v. Commissioner, 189 F.2d 14 [40 AFTR 648] (7th Cir.
1951) Often the Exchangor will want to make improvements so that they
receive finished property that is of equal or higher value than the relinquished
property.
Capital Asset: Any asset held by a taxpayer (regardless of its business use) except certain property excluded under IRC Section 1221. Capital Asset is often held for long-term period and are often tangible property which cannot easily be converted into cash and which is usually held for a long period, including real estate, buildings, machinery, fixtures, furniture and equipment.
Capital Gain:
Calculation of the difference between the sales price of the Relinquished
Property less selling expenses and less the adjusted basis of the Relinquished
Property.
Cash Boot:
Any cash, note or seller carry back received (or not reinvested) by Exchangor
during an exchange period.
Constructive Receipt:
Violation of the G(6) limitation wherein the Exchanger obtains direct or
indirect control over the exchange proceeds through an agent or employer or
other person during the exchange period.
Cost Basis: Taxpayer's cost of acquiring the property. (§1012)
Everything you give to get it.
Deferred Exchange: A Deferred Exchange is typically what people mean when referring to a 1031 exchange, Starker exchange, like-kind exchange, etc. This is A 1031 exchange conducted under the safe harbor 1994 Treasury Regulations wherein the Replacement Property is received up to 180 days after the disposition of the Relinquished Property.
Depreciation Deductions: The tax deduction for writing off the cost of theoretical wear and tear of your property and business-assets over an IRS-specified number of years. Residential rental property is typically depreciated over 27.5 years whereas commercial real estate is typically depreciated over 39 years.
Depreciation Recapture: This is really just capital gains tax applied at a higher rate (maximum 25%) rather than normal appreciation gains (maximum 15%). The federal capital gain rate is currently capped at 15%, the federal depreciation recapture rate is capped at 25%.
Disqualified Person: Section 1.1031(k)-1(k) defines a disqualified person to include an agent of the taxpayer at the time of the transaction. An agent includes a person that has acted as the taxpayer's employee, attorney, accountant, investment banker or broker, or real estate agent or broker within two years of the taxpayer's transfer of relinquished property.
However, in determining whether
a person is a disqualified person, services provided by such person for the
taxpayer with respect to section 1031 exchanges of property and routine
financial, title insurance, escrow, or trust services provided to the taxpayer
by a financial institution, title insurance company, or escrow company are not
taken into account. Under §1.1031(k)-1(k)(4), a person that is related to a
disqualified person, determined by using the attribution rules of sections
267(b) and 707(b), but substituting 10 percent for 50 percent, is also
considered a disqualified person.
Direct Deeding:
At the direction of the Qualified Intermediary, title passes directly to the
ultimate owners without the Qualified Intermediary being in the actual chain of
title.
Exchange Fees:
Exchange Period:
Interim time between the disposition of the relinquished property and the
earlier of the following:
(i) acquisition of all replacement properties
by the Exchangor;
(ii) after the 45 day identification period if
an identification has not been made or any identified properties have been
previously received by Exchangor or revoked as identified properties;
(iii) after the 180th day following the
disposition of the relinquished property;
(iv) after the Exchangors deadline for filing
its federal income tax return for the year in which the Relinquished Property
was disposed in (including extensions).
Note:
The exchange period includes all weekends and holidays. There are no extensions
if the exchange period ends on Saturdays, Sundays, or holidays.
Exchangor (Taxpayer):
Person intending to conduct a 1031 tax deferred exchange, who transfers a
Relinquished Property and thereafter receives a Replacement Property.
G(6) Limitation: Section 1.1031(k)-1(g)(6) provides that an agreement with an escrow holder, trustee or qualified intermediary must expressly limit the taxpayer's rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held in the qualified escrow or trust or by the qualified intermediary.
General Asset Class Property:
Refers to property described in classes set out in Revenue Procedure 87-56 for
depreciable tangible personal property.
Identification:
Section 1031(a)(3) and Section 1.1031(k)-1(c) provides that a written
unambiguous description of the intended replacement property or properties,
signed by the Exchangor must be
sent to the qualified intermediary or other person who is a party to the
exchange and who is not a disqualified person.
Identification Period:
Any Replacements received within the 45 day Identification period are deemed to
have been identified.
Replacements received after the 45th day must have been properly
identified in writing during the 45 day Identification period. This period runs
from the day after the close of the Relinquished Property to the 45th day
thereafter.
Like-kind Property:
Exchange must be of "like" property (i.e
Mortgage boot:
Results when an Exchangor is discharged of a debt obligation with the transfer
of the relinquished property and this debt is not offset by either: (i) new debt
(assumed or purchase money) of equal or greater amount incurred in conjunction
with the closing of the replacement property; (ii) additional cash contributed
for the acquisition of the Replacement Property equal to the amount of Exchangor's debt relief.
Non-Qualifying Property:
Property excluded from exchange treatment under IRC §1031(a)(2), such as
inventory or property held primarily for sale; beneficial interests in or an
ownership in a trust; interests in a partnership; and securities or evidences of
indebtedness.
Partial Tax Exchange: An exchange in which the Exchangor receives some like-kind property and recognizes some gain due to: (i) failure to receive adequately valued Replacement Property; (ii) mortgage boot; or cash boot.
Personal Property Exchange: A transfer of personal property (or "chattel" as apposed to real-property) as part of a tax-deferred exchange transaction involving personal property held for trade, business, or investment. This type of exchange can be used to dispose of older property such as; collector cars, artwork, farm equipment, breeding stock, aircrafts, telecommunications equipment, heavy equipment, ect. - and replace it with newer like-kind equipment.
Product Class Property:
This refers to property set out in the North American Product Classification
System (NAPCS) manual in sectors 31, 32 and 33 relating to manufacturing
industries.
Qualified Intermediary:
A
Qualified
Intermediary (or Q.I.) is person acting to facilitate an exchange under section 1031 and the
regulations. This person may not be the taxpayer or a disqualified person.
Section 1.1031(k)-1(g)(4)(iii) requires that, for an intermediary to be a
qualified intermediary, the intermediary must enter into a written "exchange"
agreement with the taxpayer and, as required by the exchange agreement, acquire
the relinquished property from the taxpayer, transfer the relinquished property,
acquire the replacement property, and transfer the replacement property to the
taxpayer.
Qualified 1031 Property: Both the Relinquished Property and the Replacement Property must be held by an Exchangor for a "productive use in Trade or Business or for Investment purposes".
Real Property Exchange: A real estate exchange (as opposed to chattel or personal property) as part of a tax-deferred exchange transaction involving real estate held for trade, business, or investment. Real Property 1031 Exchanges may involve transfers of land buildings and structures including but not limited to: Office Buildings, Industrial Warehouses, Retail Stores, Multi-family Apartment Buildings, Farms, Raw Undeveloped Land, Factories, Shopping Centers, Leasehold interest of 30 years including options to renew, and certain Tenant in Common Investments.
Received: Typically when title is transferred and the benefits and burdens of ownership are shifted. For example, when the risk of loss (if the property is damaged) is shifted to the new-owner. Another example would be when the obligation to pay property taxes is shifted to new buyer. A final exampled would be when a new buyer is entitled to possession of the property.
NOTE: Generally, just signing a standard purchase-agreement to acquire your replacement property, will NOT be adequate to complete your 1031 exchange because the benefits and burdens of ownership have not sufficiently shifted.
Relinquished Property: Property or properties given up or conveyed by Exchangor as part of a 1031 exchange.
Replacement Property:
Property or properties properly received by Exchangor as part of a 1031
exchange.
Reverse Exchange: A Reverse Exchange is typically conducted under the safe harbor established in Rev Proc 2000-37. These are "parking arrangement" where either:
(i) a property is purchased and "parked" as a potential replacement property for the benefit of a specific Taxpayer by an exchange accommodation title holder until such time as the taxpayer arranges for the transfer of the relinquished property to the ultimate transferee in a simultaneous or deferred exchange; or
(ii) a taxpayer transfers the relinquished property to be "parked" by an exchange accommodation title holder in exchange for immediately receiving the replacement property, and the exchange accommodation title holder later transfers the relinquished property to the ultimate transferee
Simultaneous Exchange:
A concurrent exchange wherein the Exchangor disposes of the Relinquished
Property and immediately receives the Replacement Property. Often conducted as a
direct swap between two parties exchanging similar properties.
Stepped-Up Basis: The basis of property transferred by inheritance (§1014) wherein the basis equals the fair market value of property on the date of the decedent's death (or on the alternate valuation date).
Stepped-Down Basis: The basis of property transferred by Gift (§102) wherein the basis equals the fair market value of property on the date transfer from Donor because the FMV of the gifted property has decrease below the Donor's basis.
Tenancy/Tennant In Common: (TIC) A fractional or partial ownership interest
in a parcel of property, rather than owning the entire piece of property.
Typically this is an undivided interest that has not be physically partitioned
or separated apart from the interests of the other co-owners.
Nation Wide Tax-Exchange Services:
|
Call Me Directly (Toll Free) At 1-888-308-1031 For A Free Consultation - Or Click Here
To Start Your Exchange Online Today! |
