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1031 Exchange Glossary, Definitions and Terms

1031 Exchange:  The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind qualified use real estate or personal property (replacement property) in a transaction structured as a tax-deferred, like-kind exchange pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations. The purpose of a 1031 Exchange is to defer Federal, and in most cases state, depreciation recapture and capital gain income tax liabilities.

Absorption Rate: The net change in space available for lease between two dates, typically expressed as a percentage of the total square footage.  Absorption rates are typically calculated and quoted for specific geographic areas.

Accelerated Cost Recovery System (ACRS):  A depreciation method used for most property placed into service from 1981 to 1986. This method allowed property to be depreciated at an accelerated or faster rate than what had been previously allowed by income tax laws and regulations. The modified accelerated cost recovery system (MACRS) replaced ACRS for assets placed into service after 1986.

Accelerated Depreciation:  A depreciation method that allows you to deduct or depreciate a greater portion of the cost of depreciable property in the first years after the property is placed into service, rather than spreading (depreciating) the cost evenly over the life of the asset, as with the straight-line method.

Accommodator:  An unrelated third party (i.e. Exeter 1031 Exchange Services, LLC) that administers the tax-deferred, like-kind exchange transaction in order to facilitate the disposition of an investor's relinquished property and the acquisition of an investor's like-kind replacement property. The Accommodator has no economic interest except for any compensation (exchange fee) it may receive for acting as an Accommodator in facilitating the exchange as defined in Section 1031 of the Internal Revenue Code. Technically, the Accommodator is known as the Qualified Intermediary, but may also be known as the Facilitator or Intermediary.

Accredited Investor (Individuals): A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase; a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

Actual Receipt:  Direct access to, or actual possession of, tax-deferred like-kind exchange funds or other property by an investor completing a tax-deferred like-kind exchange.  Receipt of the tax-deferred like-kind exchange funds by an investor during the investor's exchange period will disqualify the entire tax-deferred like-kind exchange transaction.  (See also "Constructive Receipt").

Adjusted Cost Basis:  The amount an investor uses to determine his capital gain or loss from a sale or disposition of property. To determine the adjusted cost basis for an investor's property, you must start with the original purchase cost. You then add the closing costs, cost of capital improvements and principal payments of special assessments (sewer and streets) to the property's cost basis, and then subtract any depreciation taken or were allowed to take, any casualty losses taken and/or any demolition losses taken to arrive at the adjusted cost basis.

After-Tax Return:  The return from an investment after the tax liabilities have been calculated and taken into consideration.

Agent:  An entity that acts on behalf of an investor.  A Qualified Intermediary (Accommodator or Facilitator) cannot be an investor's agent at the time of or during the tax-deferred, like-kind exchange transaction.  For tax-deferred like-kind exchange purposes, an agent includes any employee, attorney, accountant or investment banker or real estate agent or broker that has had an agency relationship with the investor within the two-year period prior to and the two-year period subsequent to the investor's tax-deferred like-kind exchange transaction.  An agency relationship does not exist with entities that offer Section 1031 Exchanges services or routine title, escrow, trust or financial services. (See Related Parties)

Alternative Minimum Tax:  A method of calculating income tax that does not allow certain deductions, credits, and exclusions. The alternative minimum tax was devised to ensure that individuals, trusts, and estates that benefit from tax preferences do not avoid paying any federal income taxes.

Asset:  Anything owned that has monetary value.

Asset Allocation:  Repositioning or rebalancing investments within an investment portfolio to maximize the return for a specific level of risk.

Asset Class:  A category of investments that contain similar characteristics such as commercial office, retail shopping or industrial properties.

Basis:  The original purchase price or cost of investment property plus any out-of-pocket expenses or closing costs such as brokerage commissions, escrow costs, title insurance premiums, sales tax (if personal property), tax-deferred like-kind exchange fees and other closing costs directly related to the acquisition.

Beneficiary:  An individual, company, organization, or other entity named in a trust, life insurance policy, annuity, will, mortgage loan or other agreement who receives a financial benefit upon the death of the principal. A beneficiary can be an individual, company or organization.

Bond:  Evidence of debt in which the issuer promises to pay bondholders a specified amount of interest and to repay the principal at maturity. Bonds are usually issued in multiples of $1,000.

Boot:  Non-like-kind property (cash or other property) given by one party to another party in a tax-deferred, like-kind exchange that is taxable.  For instance, if you trade in a delivery truck on a new model, the cash you pay in addition to your old truck is boot.  Boot received may be offset by boot given or paid.  See also "Mortgage Boot."

Build-To-Suit Exchange:  A tax-deferred, like-kind exchange whereby the Qualified Intermediary and/or Exchange Accommodation Titleholder acquires title to and holds or "parks" title to the like-kind replacement property on behalf of an investor, during which time improvements are made on or within the like-kind replacement property. Also known as an improvement or construction exchange.

Business Assets:  Real property, tangible depreciable property, intangible property and other types of property contained or used in a business. Exchanging one business for another business is not permitted under Section 1031 of the Internal Revenue Code.  However, investors may exchange business assets on an asset-by-asset basis, usually as part of a mixed-property (multi-asset) tax-deferred like-kind exchange transaction.

Capital Gain or Loss:  The difference between the selling price of an investment property and its original cost basis.  Investors should be careful not to confuse capital gains with depreciation recapture.  See also "Depreciation Recapture."

Capital Gain Tax:  Income tax levied by Federal and state governments on investments that are held long enough to qualify for capital gain income tax rates.  Investments may include real estate, stocks, bonds, collectibles and tangible depreciable personal property. (See "Income Tax").

Capital Improvement:  For land or buildings, improvements (also known as capital improvements) are the expenses of permanently upgrading your property rather than maintaining or repairing it. Instead of taking a deduction for the cost of improvements in the year paid, you add the cost of the improvements to the basis of the property. If the property you improved is a building that is being depreciated, you must depreciate the improvements over the same useful life as the building.

Capitalization Rate:  The rate of return an investor wants to achieve on real property. The capitalization rate can provide for the return of the investment and the return on the investment (profit). To obtain a property’s capitalization rate, divide the net operating income of a property by its value. To determine a property’s value, divide the property’s net operating income by the desired capitalization rate. In the Income-Capitalization Method of real property appraisal, a capitalization rate is used to appraise a property’s value. The Income-Capitalization Method of appraisal is used to value investment property, such as apartment buildings, commercial office buildings and retail malls. (See "Net Operating Income").

Cash Equivalents:  Short-term investments, such as U.S. Treasury securities, certificates of deposit, and money market fund shares, that can easily be liquidated into cash.

Charitable Lead Trust:  A trust established for the benefit of a charitable organization under which the charitable organization receives income from an asset for a set number of years or for the trustor’s lifetime. Upon the termination of the trust, the asset reverts to the trustor or to his or her designated heirs. This type of trust can reduce estate taxes and allows the trustor’s heirs to retain control of the assets.

Charitable Remainder Trust:  A trust established for the benefit of a charitable organization under which the trustor receives income from an asset for a set number of years or for the trustor’s lifetime. Upon the termination of the trust, the assets reverts to the charitable organization. The trustor receives a charitable contribution deduction in the year in which the trust is established, and the assets placed in the trust are exempt from capital gain tax.

Collectibles: Personal property, such as baseball cards, coins, stamps, works of art and memorabilia, that is held for investment. Collectibles are exchangeable under Internal Revenue Code Section 1031.

Community Property: All property acquired by a husband and wife during their marriage. Each spouse has a right to an equal interest in the property. Gifts and inheritances received by an individual spouse during the marriage are treated as separate property. Property acquired by the spouse prior to marriage, property acquired with separate property or rents or profits generated from separate property are treated as separate property. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states.

Concurrent Exchange: A tax-deferred, like-kind exchange transaction whereby the disposition of the relinquished property and the acquisition of the replacement property close or transfer at the same time. A concurrent exchange is also referred to as a simultaneous exchange.

Condominium: A form of real estate ownership, usually residential property, in which the owners own their proportionate share of a fee interest as well as an undivided proportionate share of all common areas.

Constructive Receipt:  Exercising control over your exchange funds or other property. Control over your exchange funds includes having money or property from the exchange credited to your bank account or property or funds reserved for you. Being in constructive receipt of exchange funds or property may result in the disallowance of the tax-deferred, like-kind exchange transaction thereby creating a taxable sale. (See also "Actual Receipt").

Cooperation Clause:  Language to be included in the purchase and sale contracts for both relinquished and replacement property that indicates and discloses that the transaction is part of an intended tax-deferred, like-kind exchange transaction and requires that all parties cooperate in completing said exchange. (See our sample cooperation clause language)

Cooperatives:   A form of real estate ownership, usually residential property, in which individual owners hold shares of stock in a corporation. Each owner leases property from the corporation under a proprietary lease.  Ownership interests in a "co-op" can be treated as real property interests if they are defined to be a real property interest under the laws of the state in which the "co-op" is located.

Co-Ownership (CORE):  An undivided fractional interest or partial interest in property. See also "Fractional Interests" or "Tenancy-In-Common Interests."

Corporation: A separate entity created by law. Investors in the corporation hold shares of stock. The corporation benefits from any profits generated and is responsible for any losses received. Shareholders may receive dividends on stock and incur any appreciation or depreciation on the sale of their shares of stock. Shareholders are not liable for any debts incurred by the corporation. Creditors can attach a shareholder’s shares in the corporation.

Deduction: An amount that can be subtracted from gross income, from a gross estate, or from a gift, lowering the amount on which tax is assessed.

Deferred Exchange: The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Delaware Statutory Trust (DST):  The Delaware Statutory Trust, or DST, is a separate legal entity created as a trust under Delaware statutory law. The law permits a very flexible approach to the design and operation of these entities. The Internal Revenue Service issued a revenue procedure on July 20, 2004 regarding the use of DST's for the purchase of fractional interests in real property that would qualify as like-kind replacement property in conjunction with a tax-deferred like-kind exchange transaction.

Delayed Exchange: A tax-deferred, like-kind exchange where there is a delay or period of time between the close and transfer of an investor’s relinquished property and replacement property.

Depreciable Property: Property with a useful life of more than one year that is held for investment or used in a trade or business. The cost of the asset is spread over its estimated useful life rather than deducting the entire cost in the year in which the asset is placed in service. (See "Depreciation Recapture" for more information regarding the sale or disposition of assets that have been depreciated.)

Depreciation: Periodic wearing away of property over the property’s economic life. The IRS requires investors and business owners to take a tax deduction on the amount of a property’s depreciation. The practice of amortizing or spreading the cost of depreciable property over a specified period of time, usually its estimated depreciable life. To put it another way, you are allowed a deduction on your income tax return for the wearing away and expensing over time of property or assets, such as aircraft, vehicles, livestock and buildings. A depreciable asset is a capital expenditure in depreciable property; used in a trade or business or held for the production of income and has a definite useful life of more than one year. Non-depreciable property includes vacant land. For assets that have an expected useful life of more than one year, you spread the cost of the asset over its estimated useful life rather than deducting the entire cost in the year you place the asset in service. The tax code (law) specifies the depreciation period for specific types of assets.

Depreciation Recapture: The amount of gain resulting from the disposition of property that represents the recovery of depreciation expense that has been previously deducted on an investor’s income tax returns.

Direct Deeding: A practice authorized by Treasury Revenue Ruling 90-34 whereby either the relinquished property or the replacement property can be deeded directly from seller to buyer without deeding the property to the Qualified Intermediary. (See "Sequential Deeding" for industry practices prior to Treasury Revenue Ruling 90-34.)

Disposition: The sale or other disposal of property that causes a gain or a loss including like-kind exchanges and involuntary conversions.

Dividend: A pro-rata portion of earnings distributed in cash by a contribution to its stockholders. In preferred stock, dividends are usually fixed; with common shares, dividends may vary with the performance of the company.

EAT: Acronym for Exchange Accommodation Titleholder. (See "Exchange Accommodation Titleholder").

Equity: The value of a person’s ownership in real property or securities; the market value of a property or business, less any claims or liens on it.

Escrow Agreement:  An agreement between two or more parties, requiring that certain instruments, monies, or property be placed with an independent third party called an escrow agent for safekeeping, pending the fulfillment of specified acts or conditions outlined in the agreement.

Exchange: The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Exchange Accommodation Titleholder ("EAT"): An unrelated party (i.e. Exeter Reverse 1031 Exchange Services, LLC) that holds the qualified indicia of ownership (customarily the title) of either the replacement or relinquished property in order to facilitate a reverse and/or build-to-suit tax-deferred, like-kind exchange transaction pursuant to Revenue Procedure 2000-37.

Exchange Agreement: A written agreement between the Qualified Intermediary and Investor setting forth the Investor’s intent to exchange relinquished property for replacement property, as well as the terms, conditions and responsibilities of each party pursuant to the tax-deferred, like-kind exchange transaction.

Exchange Period: The period of time during which an investor must complete the acquisition of the replacement property(ies) in his or her tax-deferred, like-kind exchange transaction. The exchange period is 180 calendar days from the transfer of the investor’s first relinquished property, or the due date (including extensions) of the investor’s income tax return for the year in which the tax-deferred, like-kind exchange transaction took place, whichever is earlier, and is not extended due to holidays or weekends.

Exchangor:  An investor who is completing the tax-deferred, like-kind exchange transaction. An investor may be an individual, partnership, LLC, corporation, institution or business.

Excluded Property: The rules for like-kind exchanges do not apply to property held for personal use (such as homes, boats or cars); cash; stock in trade or other property held primarily for sale (such as inventories, raw materials and real estate held by dealers); stocks, bonds, notes or other securities or evidences of indebtedness (such as accounts receivable); partnership interests; certificates of trust or beneficial interest; choses in action.

Fair Market Value: The price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.

Fixed Income: Income from investments, such as CDs, Social Security benefits, pension benefits, some annuities, or most bonds, that is the same every month.

Fractional Interest: An undivided fractional interest or partial interest in property. See also "Tenancy-In-Common Interests."

Going Concern Value: Additional value that attaches to property because the property is an integral part pf an ongoing business activity. It includes value based on the ability of a business to continue to function and generate business even though there is a change in ownership.

Goodwill: The value of a business or trade based on continued customer patronage due to its name, reputation, or any other intangible factors.  The goodwill of a business is not exchangeable under Section 1031 of the Internal Revenue Code or Section 1.1031 of the Treasury Regulations.

Gross Multiplier: A variation on the Income-Capitalization Method of appraising property. The Gross Multiplier approach is a way to obtain a fast, rough estimate of a property’s value. In this approach, a monthly or annual number is multiplied by a property’s gross income to obtain the property’s value. Dividing the sale price of a similar property by its gross income provides its gross multiplier.

Identification Period: The period of time during which an investor must identify potential replacement properties in his or her tax-deferred, like-kind exchange. The period is 45 calendar days from the transfer of the investor’s relinquished property and is not extended due to holidays or weekends.

Improvement Exchange: A tax-deferred, like-kind exchange whereby the Qualified Intermediary and/or Exchange Accommodation Titleholder acquires title and holds title to the replacement property on behalf of Investor, during which time new or additional structures or improvements are constructed or installed on or within the replacement property. Also known as a build-to-suit exchange.

Improvements: For land or buildings, improvements (also known as capital improvements) are the expenses of permanently upgrading your property rather than maintaining or repairing it. Instead of taking a deduction for the cost of improvements in the year paid, you add the cost of the improvements to the basis of the property. If the property you improved is a building that is being depreciated, you must depreciate the improvements over the same useful life as the building.

Intangible Personal Property: Property that does not have value itself, but represents something else. Trademarks, patents and franchises are examples of intangible property. Aircraft, business furniture and equipment are examples of tangible personal property.

Intermediary:  An unrelated third party (i.e. Exeter 1031 Exchange Services, LLC) that administers the tax-deferred, like-kind exchange transaction in order to facilitate the disposition of the Investor's relinquished property and the acquisition of the Investor's like-kind replacement property. The Intermediary has no economic interest except for any compensation (exchange fee) it may receive for acting as an Intermediary in facilitating the exchange as defined in Section 1031 of the Internal Revenue Code. The Intermediary is technically referred to as the Qualified Intermediary, but is also known as the Accommodator, Facilitator or Intermediary.

Internal Revenue Code:  Internal Revenue Code (income tax code/laws).

Internal Revenue Code Section 1031:  Section 1031 of the Internal Revenue Code allows an investor to defer his capital gain and depreciation recapture income tax liabilities when he exchanges relinquished property for like-kind or like-class replacement property.

Investor: The person or entity that is completing the tax-deferred, like-kind exchange transaction, commonly referred to as investor, exchangor, or taxpayer.

I.R.C.:  Abbreviation for the Internal Revenue Code.

Irrevocable Trust: A trust that may not be modified or terminated by the trustor after its creation.

I.R.S.:  Abbreviation for the Internal Revenue Service.

Joint Tenancy: Two or more individuals who own an undivided equal interest in a piece of property. Four unities are required to create a joint tenancy: 1) Time: all joint tenants must obtain their interest at one time; 2) Title: all must obtain their interest by the same document; 3) Interest–each joint tenant has an equal share in ownership; 4) Possession: each joint tenant has an equal right of possession.  If one of the joint tenants dies, his or her interest passes automatically to the surviving party or parties. No inheritance taxes or probate proceedings are required.  No joint tenant can sell his or her ownership interest without terminating the joint tenancy.

Like-Class and Like-Kind Personal Property: Refers to the nature or character of the property and not to its grade or quality. Personal property listed or contained within the same general asset classification or product classification ("SIC Code") will be considered to be of like-class and therefore like-kind.

Like-Kind Exchange: The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Like-Kind Property: Property that is exchangeable with another property. Refers to the nature or character of the property and not to its grade or quality.

Limited Liability Company (LLC): Members of Limited Liability companies enjoy the limited liability offered by corporations and the minimum requirements of an S corporation. Limited Liability Companies typically contain two or more members and must file articles of organization with the secretary of state, although single member LLC's are allowed in certain states.

Limited Partnership: Investors who pool their money to develop or purchase income-producing properties. Income from these properties is distributed as dividend payments. In a limited partnership, each limited partner’s liability is limited to the amount of his or her investment. A limited partner only contributes money and is not actively involved in the business. A limited partnership must have one general partner, who is personally liable for all debts.

Living Trusts: A trust created by an individual(s), often a husband and wife, during his or her lifetime. Often these individuals hold property as joint trustees for their benefit. If one spouse dies, the surviving spouse would hold title to the property as a trustee. When the surviving spouse dies, the property would pass to the beneficiaries of the trust. Holding property in a living trust allows the heirs to avoid probate and inheritance taxes.

Mixed Property (Multi-Asset) Exchange: An exchange that contains different types of properties, such as depreciable tangible personal property, real property, and intangible personal property. In a Mixed Property Exchange, relinquished properties are segmented in like-kind groups and matched with corresponding like-kind groups of replacement properties.

Modified Accelerated Cost Recovery System (MACRS): The depreciation method generally used since 1986 for writing off the value of depreciable property other than real estate, over time. MACRS allows you to write off the cost of assets faster than the straight-line depreciation method.

Mortgage Boot/Relief: When you assume debt on your replacement property that is less than the debt on your relinquished property, you receive mortgage boot or mortgage relief. Generally speaking, mortgage boot received triggers the recognition of gain and is taxable, unless offset by cash boot added or given up in the exchange. (See Boot)

Multiple Property Exchange: Disposition and/or acquisition of more than one property in a Section 1031 Exchange.

Net Operating Income: A property’s gross income (scheduled rents and 100% vacancy factor) less its total annual expenses (including management costs, utilities, services, repairs, a vacancy factor and a credit loss factor) plus any additional other income (vending machines, coin laundry operations, etc.). Principal and interest payments on the mortgage and tax liability are not included.

Ordinary Income Tax: Tax levied by Federal and state governments on a investor’s adjusted gross income. Investments that are held for less than one year are taxed at ordinary income tax rates. (See "Capital Gain Tax").

Parking Arrangement: A process or procedure whereby either an investor’s relinquished property or replacement property is acquired by an Exchange Accommodation Titleholder ("EAT") in order to facilitate a reverse and/or build-to-suit tax-deferred, like-kind exchange transaction pursuant to Treasury Revenue Ruling 2000-37.

Partial Exchange When a tax-deferred like-kind exchange entails receiving cash, excluded property and/or non-like-kind property and/or any net reduction in debt (mortgage relief) on the replacement property as well as an exchange of qualified, like-kind property. In the case of a partial exchange, income tax liability would be incurred on the non-qualifying portion and capital gain deferred on the qualifying portion under Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations.

Partnership:  An association of two or more persons who engage in a business for profit. A partnership is created by an agreement, which does not have to be in writing. However, for the partnership to hold title in a partnership name, the partnership agreement must be signed, acknowledged and recorded. Tenancy in partnership allows any number of partners to have equal or unequal interest in property in relation to their interests in the partnership. Profits and liabilities are passed through to the members. In a limited partnership, each limited partner’s liability is limited to the amount of his or her investment. A limited partner only contributes money and is not actively involved in the business. A limited partnership must have one general partner, who is personally liable for all debts. Partnership entities can complete exchanges. Partnership interests are not exchangeable. Difficulties sometimes occur in tax-deferred like-kind exchanges when some partners want to enter into an exchange while others want to sell.

Personal Property Exchange: A tax-deferred transfer of personal property (relinquished property) for other personal property (replacement property) that are of like-kind or like-class to each other.

Principal Residence Exemption: Exclusion from capital gain tax on the sale of principal residence of $250,000 for individual Investors and $500,000 for couples, filing jointly, under Internal Revenue Code Section 121. Property must have been the investor's principal residence for 24 of the last 60 months (two out of the last five years). In the case of a dual use property, such as ranch, retail store, duplex or triplex, the Investor can defer taxes on the portion of the property used for business or investment under Section 1031 of the Internal Revenue Code and exclude capital gain on the portion used as the primary residence under Section 121 of the Internal Revenue Code.

Qualified Exchange Accommodation Arrangement:  The contractual arrangement between the Investor and the Exchange Accommodator Titleholder (EAT) whereby the EAT holds a parked property pursuant to Revenue Procedure 2000-37.

Qualified Exchange Accommodation Agreement (QEAA):  The actual contract or agreement between an investor and the Exchange Accommodator Titleholder that outlines the terms for parking property pursuant to Revenue Procedure 2000-37.

Qualified Intermediary:  An unrelated third party (i.e. Exeter 1031 Exchange Services, LLC) that administers the tax-deferred, like-kind exchange transaction in order to facilitate the disposition of an investor's relinquished property and the acquisition of an investor's like-kind replacement property. The Qualified Intermediary has no economic interest except for any compensation (exchange fee) it may receive for acting as a Qualified Intermediary in facilitating the exchange as defined in Section 1031 of the Internal Revenue Code. The Qualified Intermediary is technically referred to as the Qualified Intermediary in Section 1.1031 of the Treasury Regulations, but is also known as the Accommodator, Facilitator or Intermediary.

An unrelated party (EXETER 1031 Exchange Services, LLC) who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Investor’s relinquished property and the acquisition of the Investor’s replacement property. The Qualified Intermediary has no economic interest except for any compensation (exchange fee) it may receive for facilitating the exchange as defined in Section 1031 of the Internal Revenue Code. The Qualified Intermediary is the correct technical reference pursuant to the Treasury Regulations, but the Qualified Intermediary is also known as the Accommodator, Facilitator or Intermediary.

Qualified Trust Account: A trust, wherein the trustee is not an investor or a disqualified person and that limits the investor’s rights to receive, pledge, borrow or otherwise obtain the benefits of the tax-deferred, like-kind exchange cash balance and/or other assets from the sale of the relinquished property in compliance with the Treasury Regulations. The Qualified Trust Account also ensures that the investor’s exchange funds and/or assets are held as fiduciary funds and are therefore protected against claims from potential creditors of the Qualified Intermediary.

Qualified Use: An investor must intend to use the property in their trade or business, to hold the property for investment or to hold the property for income production in order to satisfy the qualified use test.

Real Property: Land and buildings (improvements), including but not limited to homes, apartment buildings, shopping centers, commercial buildings, factories, condominiums, leases of 30-years or more, quarries and oil fields. All types of real property are exchangeable for all other types of real property. In general, state law determines what constitutes real property.

Real Estate Investment Trust (REIT): A trust that invests primarily in real estate and mortgages and passes income, losses, and other tax items to its investors. REITS are typically classified as a security and are therefore not exchangeable.

Real Property Exchange: The sale or disposition of real estate (relinquished property) and the acquisition of like-kind real estate (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Related Person: Any person bearing a relationship to the Investor as described in Section 267(b) of the Internal Revenue Code. Related parties include family members (spouses, children, siblings, parents or grandparents but not aunts, uncles, cousins or ex-spouses) and a corporation in which you have more than a 50% ownership; or a partnership or two partnership in which you directly or indirectly own more a 50% share of the capital or profits.

Relinquished Property: The property to be sold or disposed of by the Investor in the tax-deferred, like-kind exchange transaction.

Replacement Property:  The like-kind property to be acquired or received by an investor in the tax-deferred, like-kind exchange transaction.

Reverse Exchange:  A 1031 Exchange transaction whereby the like-kind replacement property is acquired first and the disposition (sale) of the relinquished property occurs at a later date.

Reverse/Improvement Exchange:  The EAT can make improvements to the replacement property before transferring it to the Investor as part of a reverse exchange.

Riparian Rights:  The rights of owners of lands bordering watercourses which relate to the water and its use.

Safe Harbors: The Treasury Regulations provide certain safe harbors that assist Qualified Intermediaries and investors in structuring tax-deferred, like-kind exchange transactions so they can be assured that no constructive receipt issues will be encountered during the exchange cycle.

Seller Carry-Back Financing: When the buyer of a property gives the seller of the property a note, secured by a deed of trust or mortgage. In a Section 1031 Exchange, seller carry-back financing is treated as boot, unless it is sold at a discount on the secondary market or assigned to the seller as a down payment on the replacement property.

Sequential Deeding:  The former practice of transferring or deeding title to an investor’s relinquished property to the Qualified Intermediary first and then sequentially and immediately transferring or deeding title from the Qualified Intermediary to the buyer in order to properly structure a tax-deferred, like-kind exchange prior to the issuance of Treasury Revenue Ruling 90-34. See "Direct Deeding" for the current-day practice. Sequential deeding is used only in special tax-deferred, like-kind exchange transactions today that require special structuring.

Simultaneous Exchange: A tax-deferred, like-kind exchange transaction whereby the disposition of the relinquished property and the acquisition of the replacement property close or transfer at the same time. A simultaneous exchange is also referred to as a concurrent exchange.

Starker Exchange: Another common name for the tax-deferred, like-kind exchange transaction based on a court decision that was handed down (Starker vs. Commissioner) in 1979. The Ninth Circuit Court of Appeals eventually agreed with Starker that its delayed tax-deferred, like-kind exchange transaction did in fact constitute a valid exchange pursuant to Section 1031 of the Internal Revenue Code. This ruling set the precedent for our current day delayed exchange structures.

Straight-line Depreciation Method: A depreciation method that spreads the cost or other basis of property evenly over its estimated useful life.

Tangible Personal Property: Property other than real estate that physically exists. Aircraft, business equipment and vehicles are examples of tangible personal property. Assets such as trademarks, patents and franchises only represent value and are therefore intangible property.

Tax-Deferral: The postponement of taxes to a later year, usually by recognizing income or a gain at a later time. Tax-deferred, like-kind exchange transactions are a common method of deferring capital gain and depreciation recapture taxes.

Tax-Deferred Like-Kind Exchange: The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture income tax liability.

Taxpayer: The person or entity that is completing the tax-deferred, like-kind exchange transaction, commonly referred to as investor, exchangor or taxpayer.

Tenancy-In-Common Interest (Co-Tenancy): A separate, undivided fractional interest in property. A tenancy-in-common interest is made up of two or more individuals, who have equal rights of possession. Co-tenants’ interests may be equal or unequal and may be created at different times and through the use of different conveyances. Each co-tenant has the right to dispose of or encumber his or her interest without the agreement of the other co-tenants. He or she cannot, however, encumber the entire property without the consent of all of the co-tenants. In a tax-deferred like-kind exchange, an Investor may acquire a tenancy-in-common interest with one or more other investors, as his or her like-kind replacement property. For purposes of a tax-deferred like-kind exchange transaction, a co-tenancy must only engage in investment activities, including supporting services that would typically accompany the investment. Co-tenants that are engaging in separate business activities are treated as partnership interests and not interests in property by the Internal Revenue Service.

Tenancy in Severalty: Separate ownership of property by one person.

Titleholder: The entity that owns/holds title to property. In an Internal Revenue Code Section 1031 Exchange, the titleholder of the relinquished property must generally be the same as the titleholder of the replacement property. If a Investor dies prior to the acquisition of the replacement property, his or her estate may complete the exchange. When the acquisition and disposition entities bear the same Investor identification numbers, such as disregarded entities (single-member LLC's and Revocable Living Trusts), the exchange usually qualifies.

Trust: A legal entity created by an individual in which one person or institution holds right to manage property or assets for the benefit of someone else.

Trustee: An individual or institution appointed to administer a trust for its beneficiaries.

Water Rights:  The rights of owners of lands bordering watercourses which relate to the water and its use.  Also known as Riparian Rights.

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