Exchange Terminology

ADJUSTED TAX BASIS – The adjusted tax basis is typically the initial amount paid for the property, plus any capital improvements, less depreciation taken during ownership and any prior deferred gain.

AGREEMENT OF SALE - The written agreement signed between buyer and seller for either the relinquished or replacement property. Also known as Purchase and Sale Agreement, Contract of Sale and many other variations.

BASIS - The basis is usually the original cost of a property.

BOOT - Boot is the taxable proceeds from a 1031 exchange transaction, which are not matched with other like-kind property. Examples of boot are cash, notes, personal property (furniture, equipment, etc.) and non-like-kind property (inventory).

CLOSING AGENT – The person responsible for preparing the settlement statement, obtaining signatures at closing and disbursing the funds. Depending on the state where the settlement is taking place the closing agent may be a settlement officer of the title company or an attorney representing the buyer or seller. Sometimes, based on geography, referred to as an escrow officer or agent.

CLOSING COSTS – Closing costs are typical settlement expenses which may include, but are not limited to, real estate commissions, realty transfer fees, legal fees associated with the sale/acquisition, document preparation, title company fees, survey fees, termite certification fee, recording fees and the 1031 exchange fees of a qualified intermediary.

DEALER - A person who holds property primarily for sale to customers in the ordinary course of trade or business.

DEPRECIATION - Depreciation is the annual deduction allowed by the Internal Revenue Service to recover the cost or other basis of business or investment property with a useful life of more than one year.

DEPRECIATION RECAPTURE - Depreciation recapture takes place when a business use or investment property is sold. Depreciation taken during ownership is recaptured at the time of sale and must be paid back at 25%.

DIRECT DEEDING – Title to property passes directly from Exchanger to Buyer and/or from Seller to Exchanger without passing through qualified intermediary.

EQUITY - Equity is the difference between the fair market value and the existing liabilities (debt) against the property.

EXCHANGER - The Exchanger is you, the taxpayer, (whether an individual or entity) who is electing to defer the capital gains through a 1031 exchange.

FAIR MARKET VALUE (F.M.V.) – An evaluation of how much a property should be expected to bring when offered in the open market for sale.

GAIN - The gain is the amount by which the sales price exceeds the adjusted tax basis.

LEGAL ADVISOR - As in any real estate transaction, competent legal advice should be sought, when necessary. The QI is not permitted to provide legal advice and will recommend you seek the advice of a competent legal advisor. If you are contemplating a reverse or construction 1031 exchange, an attorney is required to prepare some of the necessary documentation.

NET SELLING PRICE - Net Selling Price is the contract sales price less routine transaction expenses such as real estate commission, realty transfer taxes or stamps, settlement/closing fees and 1031 exchange fees.

QUALIFIED INTERMEDIARY - The use of a Qualified Intermediary (QI) is one of the four safe harbors included in Section 1031. The role of the QI is to act as a middleman in both the sale and purchase transactions. The QI is an independent party that acquires and conveys both properties and receives, holds and controls the sale proceeds. The use of a QI provides many advantages, such as the right to direct deed, protection against imputation of agency, and the safe harbor regulations relating to the security of your exchange funds. The QI prepares all necessary documentation, keeps you aware of time deadlines and is available to answer your questions throughout the exchange period. Also known as an Accommodator or Facilitator.

REAL ESTATE PROFESSIONAL - The real estate professional should be able to recognize exchange opportunities and make their clients aware of this tax strategy for investment real estate. The role of the real estate professional is the same as in any other real estate transaction. The real estate professional can be very helpful in assisting you identify suitable replacement properties.

REALIZED GAIN - The difference between the total consideration received for a property and the adjusted tax basis.

RECOGNIZED GAIN - The portion of the realized gain, which is taxable (boot).

RELINQUISHED PROPERTY - This is the property(ies) you are selling/exchanging.

REPLACEMENT PROPERTY - This is the property(ies) you wish to purchase to complete your exchange.

TAX ADVISOR - The tax advisor, who is usually familiar with your tax situation, can help you identify short and long term investment goals and determine whether or not a 1031 exchange can help achieve those goals. Additionally, the tax advisor should also assist you in determining the adjusted tax basis of the property being sold and whether or not the exchange should be contemplated. The tax advisor can help you determine how much should be reinvested and the amount of the replacement property mortgage. The QI is not permitted to give tax advice and will always recommend you seek the advice of a competent tax advisor.