1031 Exchange Terms Defined
If you’re a regular reader of my blog, you’ve noticed me mention 1031 Exchanges a time or two. This tax-deferred exchange is a great tool for investors, but if you’ve ever been through the process before, you know the terminology can sound like a foreign language. Let’s define the basic terms you are sure to encounter when starting a section 1031 transaction.
Exchanger: The entity or person performing the 1031 tax-deferred exchange, also known as the taxpayer or investor.
Relinquished Property: The property being sold by the exchanger, also known as Phase 1 property or downleg. Think of this as the property you are selling.
Replacement Property: The property being purchased by the exchanger, also known as Phase 2 property or upleg.Think of this as the property you are buying.
Like-Kind Property: Property that is exchangeable with another property. Exchanges are valid between several different types of investment properties, but both the relinquished and replacement properties must be considered like-kind to qualify for a 1031 Exchange. If you are selling an office building, you can buy land, apartments, or another office building…you just can’t buy something that is not real estate like a boat, fancy artwork, or a thoroughbred horse.
Qualified Intermediary: A non-related party who facilitates the exchange, defined as follows: (1) receives a fee (2) receives the relinquished property from the exchanger and sells to the buyer (3) purchases the replacement property from the seller and transfers it to the exchanger. For a list of QI’s I work with, please contact me.
Exchange Agreement: A written agreement between the Exchanger and Qualified Intermediary defining the transfer of the Relinquished Property, the subsequent purchase of the Replacement Property, and the restrictions on the exchange proceeds during the Exchange Period.
Identification Period: A 45-day period after the transfer of the Relinquished Property during which the Exchanger must identify in writing the Replacement Property.
Exchange Period: A 180-day period after the Relinquished Property closes during which the Replacement Property must be received. If the 180th day falls after the due date of the Exchanger’s tax return, an extension may be filed.
Basis: The cost of the Exchanger’s property plus any capital improvements and related expenses, less depreciation. The basis is used as the starting point in determining gain or loss in any transaction.
Boot: Non-like-kind property (for example cash) given by one party to another in a tax-deferred exchange. Boot is taxable, but boot received can be offset by boot given.
These terms are just scratching the surface of what you need to know to complete a 1031 tax-deferred exchange, which is why it’s so important to use a Qualified Intermediary to facilitate the process. I specialize in 1031 Exchange acquisitions and dispositions, and assist my clients in identifying the best properties to continue to meet their long-term investment goals.
Justin Langlois, CCIM is a Commercial Real Estate Investment Advisor with Stirling Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.