Need help with your 1031 exchange? Call me at (310) 318-9506, e-mail me at homes@dbre.com, or fill out the form here.

TERMINOLOGY OF 1031 EXCHANGES

Section 1031 of the Internal Revenue Code allows for non-simultaneous exchanges of investment property in the event escrows cannot be closed concurrently for the exchanged properties. The following are terms which are frequently used in connection with an exchange transaction.

ACCOMMODATOR An Independent Third Party (a qualified intermediary) who enters into an agreement with the Taxpayer (Exchangor) to transfer the relinquished property from the Taxpayer to the Buyer. The Accommodator holds the proceeds of the relinquished property until they are invested in the replacement property. At that time the Accommodator transfers title to the replacement property from the Seller to the Exchangor. The Accommodator cannot be the Exchangor's agent.

BOOT Anything of value not reinvested in like kind property such as cash, mortgage notes, notes, or other securities. The Exchangor pays taxes on the part of the exchange considered "boot", to the extent of recognized capital gain.

CONSTRUCTIVE RECEIPT It is considered "constructive receipt" if the Exchangor has control over the proceeds of the relinquished property. This applies even though he did not receive the funds, but it was possible for him to receive them.

DEFERRED EXCHANGE (Non-Simultaneous) The Exchangor transfers property held for productive use in a trade or business or for investment (relinquished property) and, at a later time, receives like kind property (replacement property). The Exchangor does not have control of the funds during the exchange and receives only a deed for a deed.

DIRECT DEEDING The Accommodator does not have to take title to the properties in the exchange. The Accommodator can instruct the closing agent to deed directly from the Exchangor to the Buyer and from the Seller to the Exchangor.

EXCHANGE AGREEMENT The agreement between the Exchangor and the Accommodator.

EXCHANGOR The Taxpayer or the Entity - person, partnership, or corporation - that accomplishes a tax deferred exchange.

LIKE KIND PROPERTY Property that is of the same character or nature, such as real property for real property. It does not have to be similar in use, such as an apartment building for an apartment building. One can be exchanged for many or many for one.

REALIZED GAIN Amount realized from a transaction over the adjusted basis of the property.

RECOGNIZED GAIN Amount reported for income tax purposes as a capital gain. It is limited to the lesser of the gain realized or the amount of boot received.

RELINQUISHED PROPERTY The original sale property, or that which is owned when the Exchangor chooses to enter into an exchange.

REPLACEMENT PROPERTY The property the Exchangor is acquiring in the exchange.

RELATED PARTIES A Related Party is defined as a linear member of a family or a corporation in which 10% or more is owned or controlled by the Exchangor. If a Related Party is involved in the exchange, the property must have been and be held for two years by both parties.

REVERSE EXCHANGES When the replacement property is acquired before the relinquished property can be sold. At this time, reverse exchanges are not covered by IRS regulations although proposed regulations are expected soon.

TIMING REQUIREMENTS The replacement property must be identified by the 45th day from the close of escrow of the relinquished property and must be transferred by the 180th day from the close of escrow of the relinquished property.