Glossary

  • 1031 Exchange

    A tax-deferral strategy under Section 1031 of the Internal Revenue Code, allowing investors to defer capital gains taxes when selling investment property and reinvesting in like-kind property.

  • Adjusted Basis

    The original purchase price of a property, adjusted for improvements, depreciation, and other factors. It’s used to determine capital gains at the time of sale.

  • Boot

    Any non-like-kind property received in a 1031 exchange, such as cash or personal property. Receiving boot can trigger partial capital gains taxes.

  • Capital Gains Tax

    The tax on profit from the sale of an asset, such as real estate, that has appreciated in value.

  • Cash-Out Refinance

    A refinancing option where an investor takes out a new mortgage on an exchanged property to access cash without triggering capital gains taxes.

  • Construction or Improvement Exchange

    A 1031 exchange, allowing investors to use part of the exchange funds to improve or build on the replacement property. Also known as a build-to-suit exchange.

  • Depreciation Recapture

    A tax that may apply if an investor sells a property for more than its depreciated value. It’s the recovery of depreciation deductions previously taken.

  • Delayed Exchange

    The most common type of 1031 exchange is where the sale of the relinquished property occurs before the purchase of the replacement property.

  • Delaware Statutory Trust (DST)

    A legal entity that allows multiple investors to co-own fractional interests in large, professionally managed properties. DSTs qualify as like-kind property in a 1031 exchange.

  • Exchange Period

    The 180-day period following the sale of the relinquished property in which an investor must acquire the replacement property to qualify for a 1031 exchange.

  • Fair Market Value

    The price that a property would sell for on the open market, used as a baseline to determine gains or losses and ensure fair transactions in exchanges.

  • Identification Period

    The 45-day period after the sale of the relinquished property in which the investor must identify potential replacement properties.

  • Like-Kind Property

    Real estate or property of the same nature and use, eligible for tax deferral in a 1031 exchange. Generally, most types of investment real estate qualify.

  • Mortgage Boot

    When the debt on the replacement property is less than the debt on the relinquished property. This could trigger capital gains taxes on the difference.

  • Qualified Intermediary (QI)

    An independent entity or professional who facilitates a 1031 exchange by holding the sale proceeds and ensuring compliance with IRS regulations.

  • Realized Gain

    The profit from the sale of a property before any adjustments for taxes, such as deferred gains through a 1031 exchange.

  • Recognized Gain

    The portion of the realized gain that is taxable. In a successful 1031 exchange, most or all of the gain is deferred and not recognized immediately.

  • Relinquished Property

    The property that is sold as part of a 1031 exchange to fund the acquisition of a like-kind replacement property.

  • Replacement Property

    The new property, acquired in a 1031 exchange, is intended to replace the relinquished property and continue serving an investment or business purpose.

  • Reverse Exchange

    A type of 1031 exchange where the replacement property is purchased before the relinquished property is sold. Often requires an Exchange Accommodation Titleholder (EAT).

  • Step-Up in Basis

    A tax provision that allows heirs to inherit property at its current fair market value, reducing potential capital gains taxes if they sell it.

  • Tax Deferral

    The postponement of tax liability to a future date, as is achieved through a 1031 exchange.

  • Unadjusted Basis

    The original cost or purchase price of a property, used as the starting point to calculate adjusted basis and capital gains.