Investment Terminology

What is 1031? | The “Basics” | Terminology | Calculating Gain | Investment Newsletter

To assist you in understanding the basic concepts and terms in relation to the IRC 1031 tax deferred exchange, we have provided below, a Glossary of Terms. This Glossary is intended to help you understand the most commonly used terminology.

Adjusted Basis: The basis of the property adjusted for any capital improvements or depreciation. To calculate the adjusted basis, take the basis (the cost of the property) and add the cost of any capital improvements made to the property during the taxpayerís ownership, and subtract any depreciation taken on the property during the same time period. Once, the adjusted basis is known, gain or loss can be computed.

Basis: The starting point for determining gain or loss in any transaction. In most cases, basis is the original cost of the taxpayerís property.

Boot: In an exchange of real property, any consideration received other than real property is ìbootî. The amount of gain recognized is always limited to the gain realized or boot whichever is the smaller amount. Therefore, 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 1031 exchanges there are two types of boot mortgage boot and cash boot. Mortgage boot is any liabilities assumed or taken subject to in the exchange.

Build to Suit: An exchange in which the Taxpayer seeks to construct improvement on the replacement property during the exchange period using proceeds from the sale of the relinquished property.

Deferred Exchange: An exchange in which transfer of title to Taxpayer of the replacement property is delayed, up to a maximum of the earlier of 180 days from transfer of the relinquished property.

Depreciation Recapture: Exchanges of like-kind property ordinarily do not trigger any depreciation recapture (deductions taken in excess of straight-line depreciation under Section 1250 IRC). Where there is an exchange into a property of lower value, or where the exchange consists partly of cash and property not of like-kinds, consideration must be given to the depreciation recapture provisions of Section 1250 and the higher capital gains tax rates for depreciation recapture.

Gain: The amount obtained for a property minus the propertyís adjusted basis, and transaction costs. No matter what the adjusted basis of a property is, there is no gain until the property is transferred. There are two types of gain: ìrealized gainî and ìrecognized gainî. 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 in which it is realized.

Qualified Intermediary: The entity that facilitates a tax deferred to enable the taxpayer to structure the transaction to qualify a tax deferred exchange.

Reverse Exchange: An exchange in which the closing of the replacement property occurs in advance of the transfer of the relinquished property

Simultaneous Exchange: An exchange in which transfer of title of Relinquished Property and the Replacement property Occur simultaneously.

Tax Deferral: The tax on an exchange transaction is not paid at the time of the transaction. Rather, it is paid at the time the replacement property is ultimately sold. Tax deferral is accomplished by substituting or carrying over the basis of the taxpayerís relinquished property to the replacement property making any necessary adjustments for additional consideration paid.

Taxpayer: Same as Exchangor. The person or entity that is exchanging property and desires to receive tax deferral benefits under the IRC Section 1031.

PLEASE NOTE: This glossary is not intended to be an exhaustive or complete glossary for legal purposes.