§1031 Buyer Representative
Financial representative with expertise in §1031 exchanges. This person’s main function is to represent the interests of the §1031 buyer.
Also known as a tax-deferred exchange, a transaction performed under Internal Revenue Code §1031, which states that neither gain nor loss is recognized if property held for investment or for productive use in a trade or business is exchanged for property held for investment, trade or business. §1031 exchange methods include delayed exchanges, simultaneous exchanges and reverse exchanges.
The basis of a property adjusted for any capital improvements or depreciation. To calculate the adjusted basis, add the basis (the cost of the property) to the cost of any capital improvements made to the property during the taxpayer’s ownership, and subtract the depreciation taken on the property during that period. Upon sale, a taxpayer will pay tax based on the net sale proceeds minus the adjusted basis (unless there is a §1031 exchange).
An increase in the value of an asset.
In tax accounting, a measure of an owner’s investment in a property. In simple terms, basis represents the original cost to acquire a property, which then becomes “adjusted basis” after subsequent capital improvements and depreciation.
Basis in the replacement property
Reflects the adjusted basis of the relinquished property, plus any additional acquisition capital or improvements and depreciation attributed to the replacement property after purchase. In a §1031 exchange, the exchanger must carry over the adjusted basis of the relinquished property.
Excess value received in an incomplete §1031 exchange. To avoid receiving boot, the exchanger must receive property with an equal or greater 1) market value and 2) debt than the property relinquished. In exchanges, there are two types of boot: cash boot and mortgage boot. Cash boot is cash or anything else of value received. Mortgage boot is any reduction in mortgage debt resulting from the exchange.
Difference between the sales price of the relinquished property, less selling expenses, and the adjusted basis of the property.
The ratio between the annual net operating income produced by a property and its current market value. Assuming a static net operating income, an increase in value will cause a decrease in the capitalization rate. When applied to a larger group of similar properties in a given area, the capitalization rate describes how much buyers are currently paying for properties as a function of their income.
The transfer of title of real property (and the proceeds of the sale) in a real estate transaction.
Tax on an exchange transaction is not paid at the time of transaction but at the time the replacement property is sold. Deferral is accomplished by substituting, or carrying over the basis of the exchanger’s relinquished property to the replacement property, with any necessary adjustments for additional consideration paid.
Also called a “delayed”, “non-simultaneous” or “Starker exchange.” A type of exchange whereby the exchanger closes the purchase of the replacement property after, but more than 180 days beyond, the closing of the relinquished property.
Decline in value of an asset for tax accounting purposes. Property depreciation occurs due to general wear and tear over the “useful life” of an asset. The Internal Revenue Code allows depreciation of improvements and fixtures to be deducted from taxable income, subject to regulations regarding the assigned “useful life” of various assets. Land cannot be depreciated.
A special tax rate applied to the amount of taxable gains attributable to prior depreciation of a property. For example, if a taxpayer is paying capital gains tax upon sale of a property, some of that tax may be at a rate of 20%, while the gain derived from prior depreciation may be taxed at 25%. §1031 exchanges ordinarily do not trigger any depreciation recapture.
The practice of investigating a potential investment.
The “cash” and other “property” available at time of closing on the sale of the relinquished property.
Also referred to as “taxpayer”. Party seeking to defer tax on gain on the exchange of investment property.
A period which ends on the earlier of 180 days after the date when the exchanger transferred the relinquished property, or the due date for the exchanger’s tax return for the taxable year when the transfer of the relinquished property occurs (such as April 15th), during which the exchanger must receive the replacement property.
The amount received from the sale of a property minus the property’s adjusted basis and transaction costs. Gain is not taxable until it is recognized, which typically is in the year the gain is realized. If gain is not recognized in the year it is realized, it is said to be deferred. In a complete §1031 exchange, realized gain is deferred (not recognized) unless boot is received. See “Boot”.
A period which ends 45 days after the date when the exchanger transferred the relinquished property, during which the exchanger must identify the replacement property. The identification must (i) appear in a written document, (ii) signed by the exchanger and (iii) be delivered to the replacement property seller or any other person that is not a disqualified person who is involved in the exchange. The custom and practice is for the identification to be delivered to the qualified intermediary, however a written statement in a contract to purchase the replacement property stating that the buyer is identifying the subject property as his replacement would meet the requirements of the identification.
Replacement property that the IRS has deemed to be similar in nature to relinquished property in a §1031 exchange. In most cases, any property held for investment, or for productive use in a trade or business, is considered “like-kind” with any other such property.
A property lease in which the tenant pays all expenses normally associated with ownership, such as utilities, maintenance, repairs, insurance, and taxes.
A loan in which the lender agrees that its sole remedy in the event of failure to repay will be to foreclose against the property securing the loan, thereby foregoing recourse in most instances against the individual owner(s).
A lease that requires the tenant to pay for property taxes, insurance and maintenance in addition to the rent.
Qualified Intermediary (“QI”)
Also known as an accommodator or facilitator. Similar to an escrow agent, this person or entity agrees to assist the exchanger to affect a tax-deferred exchange. A qualified intermediary is identified as follows:
- Not a related party to the exchanger (agent, attorney, broker, family member, etc.)
- Receives a fee
- Acquires the relinquished property from the exchanger
- Acquires the replacement property and transfers it to the exchanger
Amount of gain which is subject to tax when property is disposed of at a gain or profit in a taxable transfer or incomplete exchange.
Also known as “down leg” or “phase I” property. Property that is being sold by the exchanger.
Also known as “up leg” or “phase II” property. Property that is being purchased by the exchanger.
Term identifying the requirements to protect the exchanger’s money and the “Qualified Intermediary.”
See “Deferred Exchange”.
Tax Reform Act of 1984
In the Tax Reform Act of 1984, Congress addressed the IRS’s continued displeasure with the Starker decision by amending Section §1031 to allow Delayed Exchanges; but only if all of the exchange property is identified and acquired within specific deadlines (see Exchange Period). And most important in the Conference Report accompanying the 1984 Act, Congress specifically reaffirmed that a “sale” followed by reinvestment in like-kind property doesn’t qualify for tax deferral under Section §1031. So to qualify for tax deferral, it is still essential to cautiously structure an exchange to avoid actual or constructive “receipt” of proceeds of sale and to prevent characterization of the transaction as a taxable sale and reinvestment.
Any cash paid by way of commission or other expense in an exchange. Transaction costs are deducted in computing the consideration received.
A tax assessed by a city, county or state on the transfer of property that may be based on equity or value. The use of direct deeding in an exchange avoids additional transfer tax.