Exchange Terms

The following are commonly used exchange terms and phrases along with their non-legal definition.

ADJUSTED BASIS - Simply stated, the adjusted basis is equal to the purchase price, plus capital improvements, less depreciation. Transactions involving exchanges, gifts, probates and trust distributions may impact the property's adjusted basis. The Exchanger's tax and legal advisor is the party to look to determine an accurate adjusted basis.

BOOT -  Fair market value of non-qualified (not “like kind”) property received in the exchange.  Receipt of boot will not disqualify the exchange, but it will be taxed.
Example.  The exchangor had $200,000 of equity in a property and exchanged for another property, but only put $150,000 cash into the replacement property. In this case $150,000 would be deferred from taxes and the $50,000 cash taken at the close of escrow would be taxable. 

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.  Typically the taxpayer is burdened with a Federal Capital Gain (currently 15%) and a state capital gain percentage. (State capital gain varies from state to state).

CONSTRUCTIVE RECEIPT -  If the Taxpayer has control over or receives the exchange proceeds or property during the exchange period, he has created constructive receipt. If the I.R.S. deems consecutive receipt occurred, the exchange will not qualify under IRC §1031.

DEFERRAL - The capital gains tax is not paid (i.e. it is deferred). The tax will be deferred until the Exchanger sells the replacement property without engaging in another 1031 tax deferred exchange.

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.

EXCHANGOR  - The property owner (s)  seeking to defer capital gain tax by utilizing a 1031 exchange. The Internal Revenue Service uses the term “Taxpayer”.

EXCHANGE PERIOD - The time allowed for the Exchanger 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 the day the Relinquished Property is transferred or in a reverse exchange, it starts on the day the property is acquired by the EAT. It ends on the earlier of the 180th day after the transfer or April 15th of the following year—whichever is sooner.  If a taxpayer closes on the sale of the relinquished property after October 15th, he will need to file a tax extension to use the full 180 days.

IDENTIFICATION PERIOD - Within 45 days from the close of the relinquished property the replacement property must be identified in accordance with one of the Internal Revenue Service’s three adopted rules. If the Exchangor has multiple Relinquished Properties being pooled and exchange for one property, the deadlines begin on the transfer date of the first property.

LIKE-KIND PROPERTY - This terms refers to the nature of the property, not its grade or quality.  Generally, property meets the “like-kind” rule as long as the Exchanger’s intent is to hold the property as investment or for productive use in a trade or business. 

QUALIFIED INTERMEDIARY - The entity that facilitates the exchange for the Exchangor.  You also may hear words like Accommodator, Facilitator or  Q.I. — all of these terms mean Qualified Intermediary.

RELINQUISHED PROPERTY - The property “sold” by the Exchangor.  This is also referred to as the “exchange property” or “down-leg” property.

REPLACEMENT PROPERTY.  The property acquired by the Exchangor. This is sometimes referred to as the “acquisition property” or the “up-leg” property.

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.