Glossary
Here are 1031 exchange terms and definitions you need to know.
A 1031 exchange can be complicated. If you are not careful, you risk disqualifying your 1031 exchange, and paying capital gains taxes. With a clear understanding of important terms and definitions, you are well-equipped to make an informed decision about whether a 1031 exchange aligns with your best interests.
At Banker Exchange, we empower our clients with 1031 exchange insights, resources, and tools. As part of our efforts, we offer a glossary of common 1031 exchange terms and definitions. Take a look at our 1031 exchange glossary below — and to learn more or move forward with a 1031 exchange, please contact us today.
1031 Exchange – This real estate investing tool lets you swap an investment property for one of equal or greater value and defer capital gains or losses or capital gains taxes you would have to pay at the time of sale.
45-Day Rule – This rule applies to a deferred exchange. It gives a person up to 45 days from the date of the sale of an investment property to identify a replacement property to purchase.
180-Day Rule – This rule applies to a deferred exchange. It gives a person up to 180 days from the date of the sale of an investment property to purchase a replacement property.
Build-to-suit Exchange – Another name for an improvement exchange.
Capital Gains – These are profits that come from the sale of a property or investment.
Capital Gains Tax – This tax is levied on profits from the sale of an investment. A person must pay a short-term capital gains tax on an investment owned for one year or less. If a person owns an investment for more than one year, this individual must pay a long-term capital gains tax on the sale. The long-term capital gains tax represents 0%, 15%, or 20% of the investment profit, depending on the sale price.
Construction Exchange – Another name for an improvement exchange.
Cooperation Clause – 1031 Exchange. Both parties hereto acknowledge that either party (or its assignee) may complete an IRC Section 1031 Tax Deferred Exchange and that such party’s rights and obligations under this Contract may be assigned to a qualified intermediary or other assignee for the purpose of completing such exchange. The other party agrees to cooperate in a manner necessary to complete said exchange at no additional cost or liability to such other party.
Deferred Exchange – This type of exchange is sometimes referred to as a delayed exchange. It occurs when a person sells an investment property but does not have another property lined up for purchase. The exchange is completed when an individual identifies and buys a replacement investment property.
Exchange Accommodating Titleholder (EAT) – Holds legal title to either the relinquished or replacement property until the property can be conveyed to a buyer.
Forward Exchange – The most popular or commonly used exchange is the deferred (or forward) exchange. This type of exchange begins with a taxpayer selling the relinquished property and then acquiring the replacement property within the mandated timelines.
Improvement Exchange – Also known as a construction exchange, in an improvement exchange, an individual purchases a replacement investment property and plans to renovate or rebuild the property.
Internal Revenue Service (IRS) – The IRS governs 1031 exchanges and provides rules and regulations for 1031 exchanges.
Investment – Property considered held for investment by the IRS includes property that produces income, not derived in the ordinary course of a trade or business, from interest, dividends, annuities, or royalties.
Leasehold Exchange – A leasehold interest with a remaining term of 30 years or more is considered “like-kind” property to a fee interest in any other real property.
Like-Kind Exchange – Another name for 1031 exchange; a tax strategy used by real estate owners and investors to defer capital gains taxes on property dispositions or sales.
Qualified Intermediary (QI) – A qualified intermediary, or exchange facilitator, handles a 1031 exchange and makes sure the transaction is completed in accordance with IRS requirements.
Real Property – Also called real estate; land and generally anything built on or attached to it.
Relinquished Property – This refers to the investment property being sold in a 1031 exchange.
Replacement Property – This refers to the investment property an individual has purchased or intends to buy in a 1031 exchange. The replacement property is purchased with the proceeds an individual earns from the sale of their existing property.
Reverse Exchange –In a reverse exchange, a person buys a replacement investment property before their current property is sold.
Reverse Improvement Exchange – Improvements built on property purchased by an EAT prior to the sale of the relinquished property.
Simultaneous Exchange – Both relinquished and replacement properties are transferred at the same time. This type of exchange does not require the use of a qualified intermediary.
Tax Deferred Exchange – Another name for 1031 exchange; a tax strategy used by real estate owners and investors to defer capital gains taxes on property dispositions or sales.
Trade or Business – The IRS definition for a trade or business generally includes any activity carried on for the production of income from selling goods or performing services.