Glossary of Terms

Click on a highlighted letter below to find the first term that begins with the selected letter.

Accommodator -

As required by IRS tax-deferred regulations, a third party entity or person who assists the Exchangor/taxpayer in the transaction, by preparing the necessary documents, escrowing the exchange proceeds, and acting on behalf of the investor in the sale of the relinquished property and purchase of the replacement property. The Accommodator cannot be the taxpayer, a related party or an agent of the taxpayer. A/K/A a Qualified Intermediary or Facilitator.

Adjusted Cost Basis -

The property cost plus capital improvements, minus depreciation, plus closing costs. The fair market value of the property minus adjusted cost basis equals the indicated gain that would be presently realized without the benefit of the exchange.

Basis -

In its most general definition, the basis is the cost of the property. It is usually the starting point for determining gain or loss in any transaction.

Boot -

Any asset given or received in an exchange that is not "like-kind." Examples of boot include mortgages, cash, or other cash equivalents, tangible personal property, promissory notes or other real property. (Example: The Exchangor/Investor may give cash "boot" to acquire the replacement property to offset the mortgage paid off on the relinquished property.)

Capital Gain

- In General the difference between the sales price of the relinquished property (less selling expense) and the adjusted basis of the property.

Carryover Basis -

The relinquished property adjusted cost basis carries over to become the Exchangor's/Investor's adjusted cost basis in the new property acquired.

In General this basis may be increased by:

The amount of cash put into the transaction or the increased indebtedness acquired.

Or decreased by:

The amount of money received (mortgage boot treated as cash)
Any non like-kind property loss recognized in the exchange
Any non like-kind property loss recognized in the exchange
The amount of "cash out" in the form of money or mortgage relief received.

See also; Transfer Of Basis or Transfer Basis

Constructive Receipt -

A term that refers to the Exchangor/Investor having unrestricted control of money, consideration or other property before receiving the designated replacement property. A critical issue in the delayed exchange, as constructive receipt can void an exchange.

Deferral -

Capital gains tax which is not paid until such time (i.e. it is "deferred") as the Exchangor/Investor sells the replacement property and a recognized gain occurs.

Direct Deeding -

Instructions given to the closing agent directing title to be given the new purchasers, of either the relinquished or acquired property, in order to avoid the Intermediary appearing in the chain of title. This IRS approved procedure saves the Exchangor/Investor from imposition of additional unwanted transfer taxes and costs.

Exchange Accommodation Titleholder ("EAT")

- The entity that holds title to either the Relinquished Property or the Replacement property in connection with a Reverse Exchange. In most cases, the EAT is affiliated with the Qualified Intermediary handling the reverse exchange. EAT provides for a Safe Harbor in which IRS will not challenge the beneficial owner of such property for federal income tax purposes.

Exchange Period -

The time allowed for the Exchangor/Investor to acquire the Replacement Property in a delayed exchange, or the time allowed to dispose of the Relinquished property in a reverse exchange. In a delayed exchange, it starts on, and including, the day the Relinquished Property is transferred or in a reverse exchange, it starts on, and including, the day the property is acquired by the EAT. It ends on the earlier of the 180th day after the transfer or if no automatic extension is applied for then on the day the Exchanger's tax return in due - often April 15th if the Exchanger is not an entity on a different fiscal tax year.

Exchangor -

The owner of the investment property in a tax-deferred exchange. While ownership may be an individual, joint, corporate, partnership, etcetera the ownership identification must remain the same through the exchange transaction. Partnership interest or other beneficial interests may not change during the exchange. (A/K/A Investor).

Facilitator -

As required by IRS tax-deferred regulations, a third party entity or person who assists the Exchangor/taxpayer in the transaction, by preparing the necessary documents, escrowing the exchange proceeds, and acting on behalf of the investor in the sale of the relinquished property and purchase of the replacement property. The Facilitator cannot be the taxpayer, a related party or an agent of the taxpayer. (A/K/A an Accommodator or Qualified Intermediary).

Fair Market Value -

The likely selling price as defined by the market at a specific point in time. The burden of proof falls on the Exchangor/Investor to confirm that "sales price" is the fair market value. In a tax-deferred exchange the parties should not adjust property values to balance equities. The difference in an adjusted value of the relinquished property below fair market value is a taxable event.

Identification Period -

Within 45 days from the close of the relinquished property the replacement property must be identified in accordance with one of the three adopted identification rules. In a reverse exchange, the relinquished property must be identified within 45 days from the EAT's acquisition of the replacement property.

Identification Rules -

Restriction on the time allowed to identify the replacement property in a delayed exchange. The Exchangor/Investor must identify his replacement property by the end of the identification period - on or before the 45th day. However, it should be understood the Exchangor/Investor has until the end of and including the 180th to complete the exchange transaction.

Indicated Gain -

The adjusted cost basis of the relinquished property subtracted from the selling price of the relinquished property.

Like-Kind Property -

Property held for investment purposes or production of income. Properties involved in an exchange must be similar in nature or characteristics. The usual concept is real estate for real estate. Tangible personal property held for investment use and/or production of income may be exchanged. In a business, the real estate may be exchanged for real estate, and personal property may be exchanged for similar property, such as the same General Asset Class or Product Class. However, goodwill value is not "like-kind" and this not tax-deferred, and no transaction expenses may be allocated to reduce goodwill value in an exchange.

Mortgage Boot -

The mortgage balance satisfied at closing of the relinquished property is "mortgage relief" received by the Exchangor.

When the substitute replacement property is acquired, this "mortgage relief" must be accounted for in one of the following fashions:

Offset by "giving" new debt for the same amount
The balance of a mortgage assumed or taken subject to with an acquired property.
Giving a purchase money mortgage or new financing for an acquired property
Adding cash or boot for any difference.

Any relinquished property mortgage relief debt not offset by new debt (and/or cash or boot added) for acquisition of the replacement property is called recognized mortgage relief, and this is a taxable event.

Net Equity Proceeds -

The net proceeds, after the relinquished property closing expenses, net pro-rations, which would normally be paid the owner at closing of the relinquished property. In an exchange these Net Equity Proceeds are sent directly to Qualified Intermediary to escrow on your behalf in order to avoid constructive receipt. The Exchangor may not receive any of these funds, including interest, during the exchange period.

Original Basis -

The purchase price, including acquisition costs, of a property. This amount is often used to calculate capital gains or losses for tax purposes.

Personal Property -

Any property belonging to the Exchangor that is non-real estate related, such as a note and mortgage on other property, or boot offered into or received in the exchange transaction. A loss on "other" personal property given in an exchange is the only loss that can be deducted.

Qualified Intermediary -

As required by IRS tax-deferred regulations, a third party entity or person who assists the Exchangor/taxpayer in the transaction, by preparing the necessary documents, escrowing the exchange proceeds, and acting on behalf of the investor in the sale of the relinquished property and purchase of the replacement property. The Qualified Intermediary cannot be the taxpayer, a related party or an agent of the taxpayer. A/K/A Facilitator or Accommodator.

Qualified Exchange Accommodation Agreement ("QEAA") -

A written agreement whereby the EAT (Exchange Accommodation Titleholder) agrees to purchase and hold title to the replacement property or relinquished property in a "Reverse-Exchange".

Realized Gain -

Refers to gain that is not yet taxed. In a successful exchange the gain is realized but not recognized and therefore not taxed.

Recognized Gain -

Refers to the amount of gain that is subject to tax when property is disposed of at a gain or profit in a taxable transfer. It can also be that portion of a deferred exchange, which does not qualify for deferred treatment such as net loan relief not offset or cash and/or boot received by the Exchangor/Investor.

Related Party -

As applied to IRC Section 1031, a related party is any person or entity bearing a relationship to the Exchanger such as: members of a family - brothers, sisters, spouse, ancestors and lineal descendants; a grantor or fiduciary of any trust; two corporations which are members of the same controlled group or individuals; corporations and partnerships with more than a 10% direct or indirect ownership of the stock, capital or profits in these entities.

Relinquished Property -

The investment property that the Exchangor has sold subject to the original intent of the tax-deferred exchange as shown in the special clauses of the sales contract and the Property Exchange Agreement with the Qualified Intermediary.

Replacement Property -

The property that the Exchangor acquires when making an exchange. It is sometimes referred to as the identified substitute replacement property. The concept is that the exchange transaction from the relinquished property to the replacement property is the same like-kind investment with adjustments for the carry over basis.

Safe Harbors -

Methods provided by the IRS Code to prevent the receipt or constructive receipt of non-like/kind property by an exchanging taxpayer.

Stepped-up Basis -

Basis for heirs who acquire property by inheritance, which is the fair market value of the property at the time of death.

Transfer Of Basis -

The relinquished property's adjusted cost basis carries over to become the Exchangor's adjusted cost basis in the new property acquired.

In General this basis may be increased by:

The amount of cash put into the transaction or the increased indebtedness acquired.

Or decreased by:

The amount of money received (mortgage boot treated as cash)
Any non like-kind property loss recognized in the exchange
Any non like-kind property loss recognized in the exchange

The amount of "cash out" in the form of money or mortgage relief received.
See also; Carryover Basis

Transfer Tax -

A tax assessed by a city, county or state on the transfer of property that may be based on equity or value.