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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 or for use in a trade
or business. There are several types of 1031 exchange
methods used today, including delayed exchanges, simultaneous
exchanges, and reverse exchanges.
Accommodator - A qualified intermediary
who agrees to assist the exchanger to effect 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 - Generally speaking
in a standard purchase of real property, the adjusted
basis is equal to the purchase price plus capital improvements
less depreciation. Transactions involving exchanges,
gifts, probates and receiving property from a trust
can have an impact on calculating the property's adjusted
basis. The taxpayer's C.P.A. or tax advisor is the party
to look to for these types of questions.
Boot - Boot is any type of Personal
Property received in a Real Property transaction that
is not like kind, such as cash, mortgage notes, a boat,
or stock. The Exchanger pays taxes on the boot to the
extent of recognized capital gain. In an exchange if
any funds are not used in purchasing the Replacement
Property, that also will be called boot.
Capital Gain - Generally speaking,
this is the difference between the sales price of the
Relinquished Property less selling expenses and the
adjusted basis of the property.
Constructive Receipt - The critical
question in a delayed exchange is whether the Exchanger
has control over the proceeds during the exchange period.
Any type of account to maintain exchange proceeds must
substantially limit and restrict the Exchanger's control
to avoid having the exchange disallowed.
Delayed Exchange - Also called non-simultaneous,
deferred, and Starker. A delayed exchange is when the
Replacement Property is received after 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
occurs first.
Direct Deeding - At the direction of
the accommodator, title passes directly to the ultimate
owners without the accommodator being in the chain of
title.
Identification Period: Within forty-five
days from the close of the Relinquished Property the
Replacement Property must be identified under one of
the three adopted rules; See: Adopted Treasury Regulations
Concerning Identification Of Replacement Property
Like-Kind Property - Refers to the
nature of the property the Exchanger gives up or receives
in the exchange, such as real property for real property.
It does not have to be similar in use such as raw land
for raw land. The land could be exchanged for any other
real property that will be used in a trade or business
or held for investment.
Realized Gain - Refers to a gain that
is not necessarily taxed. In a successful exchange the
gain is realized but not recognized and therefore not
taxed.
Recognized Gain - Refers to the amount
of gain which is subject to tax when property is disposed
of at a gain or profit in a taxable transfer.
Relinquished Property (Property Sold) - The
property given up by the Exchanger to start the 1031
exchange transaction. This is Phase One of the transaction.
Replacement Property (Property Bought) -The
property the Exchanger acquires in a 1031 exchange or
Phase Two of the transaction.
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
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.
- Note -
The terms contained on this Web page are defined in
their most commonly used form. Should more precise interpretations
of these terms be necessary, we advise you to seek the
counsel of an attorney.
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