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Industry Terms

§1031 Buyer Representation 
Real Estate Brokerage Company with expertise in §1031 Exchanges. Their main function is to represent the interests of the §1031 buyer rather than to the property broker who has a fiduciary responsibility to the seller.
 
§1031 Exchange
Internal Revenue Code, Section §1031 states that neither gain nor loss is recognized if property held for investment or for productive use in a trade or business is exchanged for property held for investment, trade or business. There are several kinds of §1031 exchange methods used today, including delayed exchanges, simultaneous exchanges, and reverse exchanges. 
 
§1031 Tax Deferred Exchange
An exchange where, pursuant to "An Agreement" the taxpayer transfers property held either for productive use in a trade, business or for investment and receives a new property to be held either for productive use in a trade, business or for investment. 
 
1991 Revisions
Year when the IRS held a hearing to "clean up" the Tax Reform Act of 1984 and provide uniform terminologies. A main result of this revision was that the IRS eventually had a change of attitude toward Delayed Exchanges by accepting them instead of fighting them.
 
Accommodator
A qualified intermediary who agrees to assist the exchanger to affect a tax-deferred exchange. Also described as a facilitator or an intermediary, a qualified intermediary cannot be the taxpayer, a related party, or an agent of the taxpayer. 
 
Adjusted Basis
The basis of a property adjusted for any capital improvements or depreciation. To calculate the adjusted basis, add the basis (the cost of the property), to the cost of any capital improvements made to the property during the taxpayer's ownership, and subtract the depreciation taken on the property during that specific time period. Once the adjusted basis is known, the gain or loss can be computed. 
 
Appreciation
An increase in an asset’s value. 
 
Asset allocation
Dividing investments among different kinds of assets, such as stocks, bonds, real estate and cash, to balance the risks of investing. Asset allocation models vary based on an individual’s specific financial goals and situation.
 
Basis
System of measuring investment in property for tax purposes. 
Example: Original cost, plus improvements, minus depreciation taken. 
 
Basis in the Replacement Property
In an exchange, the deferral of the tax on the gain is accomplished by requiring the taxpayer to carryover (substitute) the basis of the relinquished property to the replacement property with suitable adjustments in the event additional consideration is paid. 
 
Bear market
An extended period of falling value of the overall market, accompanied by widespread pessimism. 
 
Boot
In an exchange of real property, any consideration received other than real property is "boot." The amount of gain recognized is always limited to the gain realized or boot, whichever is the smaller amount. For a transaction to result in no recognized gain, the taxpayer must receive property with an equal or greater market value and debt than the property relinquished, and receive no boot. In exchanges, there are two types of boot: cash boot and mortgage boot. Cash boot is cash or anything else of value received. Mortgage boot is any liabilities assumed or taken subject to in the exchange. 
 
Broker-Dealer
An individual or firm that is in the business of buying and selling securities. Broker/dealers are registered with the Securities and Exchange Commission (SEC). 
 
Bull market
An extended period of rising value of the overall market. 
 
Buyer
Person who wants to acquire the exchanger's property. For a three- or four-party exchange, the buyer usually has cash.
 
Capital appreciation
Increased market value of an asset as measured by share price. 
 
Capital Gain
Difference between the sales price of the Relinquished Property less selling expenses and the adjusted basis of the property. 
 
Capitalization Rate
a measure of the ratio between the net operating income produced by an asset (usually real estate) and its capital cost (the original price paid to buy the asset) or alternatively its current market value. 
 
Class “A” property
Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high quality standard finishes, state of the art systems, exceptional accessibility, and a definite market presence.
 
Concurrent Exchange
Also referred to as a simultaneous exchange when the Exchanger transfers out of the Relinquished Property and receives the Replacement Property at the same time. 
 
Constructive Receipt
Control of the cash earnings without real physical possession by the Exchanger or their agent. 
 
Closing
The transfer of title of real property in a real estate transaction.
 
Deferral
Tax on an exchange transaction is not paid at the time of transaction but at the time the replacement property is sold. Deferral is accomplished by substituting, or carrying over the basis of the taxpayer's relinquished property to the replacement property making any necessary adjustments for additional consideration paid. 
 
Deferred Exchange
term currently used in place of "Non-Simultaneous Exchange" or "Starker Exchange." A type of exchange where the Exchanger utilizes the exchange period. 
 
Delayed Exchange
Also known as non-simultaneous, deferred, and Starker. A delayed exchange is when the Replacement Property is received following the transfer of the Relinquished Property. All potential Replacement Properties must be identified within 45 days from the transfer of the Relinquished Property and the Exchanger must receive all Replacement Properties within 180 days or the due date of the Exchanger's tax return, whichever comes first. 
 
Depreciation
Decline in value of an asset. Property depreciation occurs due to general wear and tear. 
 
Depreciation Recapture
Exchanges of like-kind property ordinarily do not trigger any depreciation recapture (that is, deductions taken in excess of straight-line depreciation under Section 1250 IRC). When there is an exchange into a property of lesser value, or when the exchange consists partly of cash and property not of a like-kind, consideration must be given to the depreciation recapture provisions of Section 1250 and the higher capital gain tax rates for depreciation recapture. 
 
Direct Deeding
Vested owner deeds directly to the final owner. Doesn't eliminate the duties of the Qualified Intermediary to acquire and transfer the relinquished property and acquire and transfer the Replacement Property. 
 
Diversification
Similar to asset allocation, diversification is a strategy designed to reduce overall portfolio risk. 
 
Due diligence
The practice of investigating a potential investment.
 
Exchange Equity
The "cash" and other "property" available at time of closing on the sale of the relinquished property. 
 
Exchangor
Party wishing to defer tax on gain on the exchange of investment property. 
 
Exchange Period
The replacement property should be received by the taxpayer within the "Exchange Period," which ends on the earlier of 180 days after the date which the taxpayer transferred the property relinquished, or the due date for the taxpayer's tax return for the taxable year when the transfer of the relinquished property occurs (such as April 15th). The exchange period is 180 days, due to the Taxpayer's ability to extend the date of payment.
 
Gain
The amount obtained for a property minus the property's adjusted basis, and transaction costs. No matter what the adjusted basis of a property is, there's no gain until the property is transferred. There are two types of gain "realized gain" and recognized gain." Realized gain is the difference between the total consideration (cash and anything else of value) received for a piece of property and the adjusted basis. Realized gain is not taxable until it is recognized. Gain is usually, but not always, recognized in the year which it is realized. If gain is not recognized in the year it is realized, it is said to be deferred. In an exchange under Section §1031, realized gain is recognized in part or in full to the extent that boot is received. See Boot. Where only like-kind property is received, no gain is recognized at the time of the exchange. 
 
Growth Factor
Interest earned for the duration of the exchange that is payable at the end.
 
Identification Period
The replacement property must be identified within 45 days of the close of escrow/closing the relinquished property. If the 45th day happens to fall on a weekend or legal holiday, it is not to be extended. 
 
Income property
Real estate that generates cash flow. 
 
Intermediary
The party who facilitates a tax deferred exchange by acquiring and selling property in an exchange. The intermediary plays a role in almost all exchanges these days. He or she neither begins nor ends the transaction with any property. He or she buys and then resells the properties in return for a fee.
 
Leverage
The degree to which an investor or business is using borrowed money. 
 
Liquidate
To convert assets into cash. 
 
Like-Kind Property
Any valid property for any other valid property if the property(s) are held for productive use in trade, business or for investment purposes. 
 
Liquidity
The ability of an asset to be converted into cash quickly.
 
National Association of Securities Dealers (NASD)
A self-regulatory securities industry organization responsible for the operation and regulation of the stock market and for conducting regulatory reviews of members' business activities. 
 
Net lease
A property lease in which the tenant pays all expenses normally associated with ownership, such as utilities, maintenance, repairs, insurance, and taxes. 
 
Net worth
Total assets minus total liabilities of an individual or company. 
 
Non Recourse Loan
A loan whose terms include the lender agreeing that its sole remedy in the event of failure to repay will be to foreclose against the property securing the loan. 
 
NNN Triple lease
A lease that requires the tenant to pay for property taxes, insurance and maintenance in addition to the rent (also referred to as Net Net Net Lease or Triple Net Lease).
 
Operating costs
The day-to-day expenses of running a business. 
 
Ordinary income
Income other than capital gains.
 
Passive income
Income derived from business investments in which the individual is not actively involved, such as a real estate limited partnership. 
 
Portfolio
All investments collectively owned by the same individual or organization.
 
Qualified Intermediary (QI)
The corporation who acts as the accommodator in the exchange. A qualified intermediary is identified as follows:
 
  • Not a related party to the Exchanger, (e.g. agent, attorney, broker, etc.);
  • Receives a fee;
  • Acquires the relinquished property from the Exchanger; and
  • Acquires the replacement property and transfers it to the Exchanger.
  • Realized Gain
  • Gain that is not necessarily taxed. In a successful exchange the gain is realized but not recognized and thus not taxed. 
 
Recognized Gain
Amount of gain which is subject to tax when property is disposed of at a gain or profit in a taxable transfer. 
 
Relinquished Property
Old property that is being sold by the Exchanger. (Formally called the Down leg property, currently called Phase I property). 
 
Replacement Property
New property being acquired or the target property being brought by Exchanger. (Formally called up leg property, currently called Phase II property). 
 
Return
The profit made on an investment, expressed annually as a percentage of the total amount invested. 
 
Registered Representative
An individual who is licensed to sell securities and has the legal power of an agent, having passed the Series 7and Series 63 examinations. Usually works for a brokerage licensed by the SEC, NYSE, and NASD. 
 
Risk
The possibility of loss of capital on an investment.
 
Safe Harbor
Term identifying the requirements to protect the Exchanger's money and the "Qualified Intermediary." 
 
Securities and Exchange Commission (SEC)
The primary federal regulatory agency for the securities industry, whose responsibility is to promote full disclosure and to protect investors against fraudulent and manipulative practices in the securities markets. 
 
Securities Investor Protection Corporation (SIPC)
A non-profit membership corporation established by Congress that insures securities and cash in customer accounts up to $500,000 (up to $100,000 in cash) in the event of brokerage bankruptcy. 
 
Seller
The person who owns the property that the taxpayer wants to acquire in the exchange in a three or four party exchange. 
 
Sequential Deeding
Property that's deeded to the Intermediary whereby the Intermediary deeds to the final owner. 
 
Simultaneous/Concurrent
Exchange without any time between the sale and purchase. 
 
Simultaneous Exchange
Also referred to as a concurrent exchange when the Exchanger transfers out of the Relinquished Property and receives the Replacement Property at the same time. 
 
Starker Exchange
A term used to describe delayed exchanges. "Starker vs. Commissioner" established the delayed exchange concept. The term "starker exchange" is used as another way of referring to delayed, deferred or any other non-simultaneous exchange.
 
Tax-advantaged
Having other tax benefits that typically result in tax savings. 
 
Taxpayer
Also known as the exchanger. A taxpayer has property and would like to exchange it for new property. While all parties in an exchange are theoretically taxpayers, this term applies to the party who expects to receive tax deferred treatment under Section §1031. 
 
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 doesn't qualify for tax deferral under Section §1031. So to qualify for tax deferral, it is still essential to cautiously 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. 
 
Tax shelter
A technique that allows an investment to be legally exempt from federal, state, and local taxes to varying degrees. 
 
Transaction Costs
Any cash paid by way of commission or other expense in an exchange. Transaction costs are deducted in computing the consideration received. 
 
Transfer Tax
A tax assessed by a city, county or state on the transfer of property that may be based on equity or value. The use of direct deeding in an exchange avoids additional transfer tax.
 
Undervalued
Perceived to be below its value.