Glossary of Terms


TermDefinition
1031 Exchange

The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Abatement

In general, a decrease in the amount of taxation faced by an individual or company. A reduction in amount or intensity. Usually applies to decrease in taxes or rent. Examples of an abatement include a tax decrease, a reduction in penalties, or a rebate. Tenants may also ask for an abatement in rent over a period when their use of the property has been interrupted or inhibited by actions of the landlord, such as renovation of the structure.

Above Building Standard

Typically refers to items not included in the Building’s construction work letter. The work letter indicates what the ownership of the building will include in a standard office buildout for their building.

Absorption Rate

The percentage of space in a market either taken off the market or added back into the pool of existing commercial space. Typically a gain in market absorption represents space that is now leased, that was not previously leased, or in a negatively absorbed market, space that was leased that’s now vacant.

Accelerated Depreciation

A depreciation method that allows a property owner to deduct a greater portion of the cost of depreciable property in the first years after the property is placed in service, rather than spreading the cost evenly over the life of the asset, as with the straight-line depreciation method.

Accommodator

A qualified intermediary who agrees to assist the exchangor to affect a tax-deferred exchange. Also described as a facilitator or an intermediary, a qualified intermediary cannot be the taxpayer, a related party, or an agent of the taxpayer.

Actual Receipt

Direct access to your exchange funds or other property. Receiving exchange funds during the exchange period will disqualify your exchange.

Ad Valorem Tax Purposes

A tax based on the value of the thing being taxed. Cities, counties, and school districts raise most of their tax revenue from ad valorem taxes on real estate.

Example: If the ad valorem tax rate is 1%, the tax would be $1 per $100 of assessed value.

Adjusted Basis

The basis of the property adjusted for any capital improvements or depreciation. To calculate the adjusted basis, take the basis (the cost of the property) and add the cost of any capital improvements made to the property during the taxpayer's ownership, and subtract any depreciation taken on the property during the same time period. Once the adjusted basis is known, gain or loss can be computed on a transaction. The amount you use to determine your capital gain or loss from a sale or disposition of property. To determine the adjusted cost basis for your property, you must start with the original purchase cost. You then add any out-of-pocket expenses such as brokerage commissions, escrow costs, title insurance premiums, sales tax (if personal property) and other closing costs directly related to the acquisition, your cost of capital improvements and principal payments of special assessments (sewer and streets) to the property, and then subtract depreciation you have taken or were allowed to take, any casualty losses taken and/or any demolition losses taken.

Amortization

In reckoning the yield of a bond bought at a premium, the periodic subtraction from its current yield of a proportionate share of the premium between the purchase date and the maturity date.

Amortization Schedule

A table that shows the periodic payment, interest and principal requirements, and unpaid loan balance for each period of the life of a loan.

Annual Bumps

Slang for annual increases is such items as rent or operating expense increases.

Annual Operating Expense Increase (Overage)

In leases for retail stores, amounts to be paid, based on gross sales, over the Base Rent. See Percentage Lease.

Example: Johnson leases retail space in a shopping center. The lease calls for a base rent of $2,500 per month plus 5% of gross sales over $10,000. The first month, Johnson has sales of $20,000. In addition to the $2,500 base rent, Johnson pays an overage of $500 [.05 • ($20,000 - $10,000)].

As Is

Without guarantees as to condition, as in a sale. Premises are accepted by a buyer or tenant as they are, including physical defects except Latent Defects.

Example: Johnson purchases a shopping center from Smith with the understanding that the building is to be conveyed "As Is". When Johnson discovers that the roof leaks, Smith is not legally responsible for repairs.

Balancing the Exchange

A balanced exchange ensures that the taxpayer defers 100% of his or her taxes on capital gain and depreciation recapture. To achieve a balanced exchange 1) acquire a replacement property that is equal to or greater value than the relinquished property; 2) reinvest all of the net equity from the relinquished property in the replacement property; and 3) assume debt on the replacement property that is equal to or greater than the debt on the replacement property or contribute cash to make up the deficiency (See Partial Tax Deferment; Boot and Mortgage Boot/Relief).

Basis

The starting point for determining gain or loss in any transaction. In general, basis is the cost of the taxpayer's property.

Boot

In an exchange of real property, any consideration received other than real property is boot. ”The amount of gain recognized is always limited to the gain realized or boot, whichever is the smaller amount. Therefore, for a transaction to result in no recognized gain, the taxpayer must receive property with an equal or greater market value and debt than the property relinquished, and receive no boot. 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 liabilities assumed or taken subject to in the exchange.

Build-To-Suit Exchange

A tax-deferred, like-kind exchange whereby the Qualified Intermediary and/or Exchange Accommodation Titleholder acquires title and holds title to the replacement property on behalf of the Exchangor, during which time structures or improvements are constructed or installed on or within the replacement property. Also known as an Improvement Exchange.

Capital Gain/Loss

The difference between the sales price of the Relinquished Property less selling expenses and the adjusted basis of the property.

Capital Gain Tax

Tax levied by Federal and state governments on investments that are held for one year or more. Investments may include real estate, stocks, bonds, collectibles and tangible depreciable personal property.

Capital Improvements

For land or buildings, improvements (also known as capital improvements) are the expenses of permanently upgrading your property rather than maintaining or repairing it. Instead of taking a deduction for the cost of improvements in the year paid, you add the cost of the improvements to the basis of the property. If the property you improved is a building that is being depreciated, you must depreciate the improvements over the same useful life as the building.

Community Property

All property acquired by a husband and wife during their marriage. Each spouse has a right to an equal interest in the property. Gifts and inheritances received by an individual spouse during the marriage are treated as separate property. Property acquired by the spouse prior to marriage, property acquired with separate property or rents or profits generated from separate property are treated as separate property. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states.

Concurrent Exchange

A tax-deferred, like-kind exchange transaction whereby the disposition of the relinquished property and the acquisition of the replacement property close or transfer at the same time. A Concurrent Exchange is also referred to as a Simultaneous Exchange.

Constructive Receipt

Exercising control over your exchange funds or other property. Control over your exchange funds includes having money or property from the exchange credited to your bank account or property or funds reserved for you. Being in constructive receipt of exchange funds or property may result in the disallowance of the tax-deferred, like-kind exchange transaction thereby creating a taxable sale.

Cooperation Clause

Language to be included in the Purchase and Sale Contracts for both relinquished and replacement property that indicates and discloses that the transaction is part of an intended tax-deferred, like-kind exchange transaction and requires that all parties cooperate in completing said exchange.

Deduction

An amount that can be subtracted from gross income, from a gross estate, or from a gift, lowering the amount on which tax is assessed.

Deferral

The tax on an exchange transaction is not paid at the time of the transaction. Rather, it is paid at the time the replacement property is ultimately sold. Deferral is accomplished by substituting, or carrying over the basis of the taxpayer's relinquished property to the replacement property making any necessary adjustments for additional consideration paid.

Deferred Exchange

The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Delayed Exchange

A delayed exchange is when the Replacement Property is received after the transfer of the Relinquished Property. All potential Replacement Properties must be identified within 45 days from the transfer of the Relinquished Property and the Exchangor must receive all Replacement Properties within 180 days or the due date of the Exchangor's tax return, whichever occurs first. Also called non-simultaneous, deferred, and Starker.

Depreciable Property

Property with a useful life of more than one year that is held for investment or used in your trade or business. You spread the cost of the asset over its estimated useful life rather than deducting the entire cost in the year that you placed the asset in service.

Depreciation

Periodic wearing away of a property over the property's economic life. The IRS requires investors and business owners to take a tax deduction on the amount of a property's depreciation. The practice of amortizing or spreading the cost of depreciable property over a specified period of time is usually its estimated depreciable life. Non-depreciable property includes vacant land. For assets that have an expected useful life of more than one year, you spread the cost of the asset over its estimated useful life rather than deducting the entire cost in the year you place the asset in service. The tax code (law) specifies the depreciation period for specific types of assets.

Depreciation Recapture

The amount of gain resulting from the disposition of property that represents the recovery of depreciation expense that has been previously deducted on the Taxpayer's (Exchangor's) income tax returns.

Equity

The value of a person's ownership in real property or securities; the market value of a property or business, less any claims or liens on it.

Escrow

An agreement between two or more parties, requiring that certain instruments, monies, or property be placed with a third party for safekeeping, pending the fulfillment of performance of a specified act or condition.

Exchange

The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Exchange Accommodation Titleholder (EAT)

An unrelated party that holds the title of either the replacement or relinquished property in order to facilitate a reverse and/or build-to-suit tax-deferred, like-kind exchange transaction pursuant to Revenue Procedure 2000-37.

Exchange Agreement

A written agreement between the Qualified Intermediary and Exchangor setting forth the Exchangor's intent to exchange relinquished property for replacement property, as well as the terms, conditions and responsibilities of each party pursuant to the tax-deferred, like-kind exchange transaction.

Exchange Period

The period of time during which the Exchangor must complete the acquisition of the replacement property(ies) in his or her tax-deferred, like-kind exchange transaction. The exchange period is 180 calendar days from the transfer of the Exchangor's first relinquished property, or the due date (including extensions) of the Exchangor's income tax return for the year in which the tax-deferred, like-kind exchange transaction took place, whichever is earlier, and is not extended due to holidays or weekends.

Exchangor

The Taxpayer who is completing the tax-deferred, like-kind exchange transaction. An Exchangor may be an individual, partnership, LLC, corporation, institution or business.

Excluded Property

The rules for like-kind exchanges do not apply to property held for personal use (such as homes, boats or cars); cash; stock in trade or other property held primarily for sale (such as inventories, raw materials and real estate held by dealers); stocks, bonds, notes or other securities or evidences of indebtedness (such as accounts receivable); partnership interests; certificates of trust or beneficial interest; choses in action.

Fair Market Value

The price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.

Fractional Interest

An undivided fractional interest or partial interest in property.

Gain

The amount obtained for a property minus the property's adjusted basis, and transaction costs. No matter what the adjusted basis of a property is, there is no gain until the property is transferred. There are two types of gain: realized gain and recognized gain.” Realized gain is the difference between the total consideration (cash and anything else of value) received for a piece of property and the adjusted basis. Realized gain is not taxable until it is recognized. Gain is usually, but not always, recognized in the year which it is realized. If gain is not recognized in the year it is realized, it is said to be deferred. In an exchange under Section 1031, realized gain is recognized in part or in full to the extent that boot is received. Where only like-kind property is received, no gain is recognized at the time of the exchange.

Identification Period

The period of time during which the Exchangor must identify potential replacement properties in his or her tax-deferred, like-kind exchange. The period is 45 calendar days from the transfer of the Exchangor's relinquished property and is not extended due to holidays or weekends.

Improvement Exchange

A tax-deferred, like-kind exchange whereby the Qualified Intermediary and/or Exchange Accommodation Titleholder acquires title and holds title to the replacement property on behalf of Exchangor, during which time new or additional structures or improvements are constructed or installed on or within the replacement property. Also known as a Build-to-Suit Exchange.

Intermediary

An unrelated party who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Exchangor's relinquished property and the acquisition of the Exchangor's replacement property. The Intermediary has no economic interest except for any compensation (exchange fee) it may receive for acting as an Intermediary in facilitating the exchange as defined in Section 1031 of the Internal Revenue Code. The Intermediary is technically referred to as the Qualified Intermediary, but is also known as the Accommodator, Facilitator or Intermediary.

Internal Revenue Code §1031

Section 1031 of the Internal Revenue Code allows an Exchangor to defer his or her capital gain tax and depreciation recapture tax when he or she exchanges relinquished property for like-kind or like-class replacement property.

Like-Kind Exchange

The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Like-Kind Property

Refers to the nature of the property the Exchangor gives up or receives in the exchange, such as real property for real property. It does not have to be similar in use such as raw land for raw land. The land could be exchanged for any other real property that will be used in a trade or business or held for investment.

Limited Liability Company (LLC)

Members of Limited Liability Companies enjoy the limited liability offered by corporations and the minimum requirements of an S corporation. Limited Liability Companies typically contain two or more members and must file articles of organization with the secretary of state, although single member LLCs are allowed in certain states.

Limited Partnership

A form of partnership in which there is one or more general partners, jointly and severally responsible as ordinary partners with liability, and one or more special partners, who are not liable for the debts of the partnership beyond the amount of cash they contribute/invest as capital.

Liquidity

Measures the ability to convert an asset to cash quickly.

Mortgage Boot/Relief

When you assume debt on your replacement property that is less than the debt on your relinquished property, you receive mortgage boot or mortgage relief. Generally speaking, mortgage boot received triggers the recognition of gain and is taxable, unless offset by cash boot added or given up in the exchange.

Multiple Property Exchange

Disposition and/or acquisition of more than one property in an IRS Section 1031 Exchange.

Ordinary Income Tax

Tax levied by Federal and State governments on a taxpayer's adjusted gross income. Investments that are held for less than one year are taxed at ordinary income tax rates.

Partial Exchange

When an exchange entails receiving cash, excluded property and/or non-like-kind property and/or any net reduction in debt (mortgage relief) on the replacement property as well as an exchange of qualified, like-kind property. In the case of a partial exchange, tax liability would be incurred on the non-qualifying portion and capital gain deferred on the qualifying portion under IRS Section 1031.

Preservation of Capital

When the cost value of an investment is maintained or increased.

Qualified Intermediary (QI)

An unrelated party who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Exchangor's relinquished property and the acquisition of the Exchangor's replacement property. The Qualified Intermediary has no economic interest except for any compensation (exchange fee) it may receive for facilitating the exchange as defined in Section 1031 of the Internal Revenue Code. The Qualified Intermediary is the correct technical reference pursuant to the Treasury Regulations, but the Qualified Intermediary is also known as the Accommodator, Facilitator or Intermediary.

Qualified Use

An Exchangor must intend to use the property in their trade or business, to hold the property for investment or to hold the property for income production in order to satisfy the qualified use test.

Real Estate Exchange

The sale or disposition of real estate (relinquished property) and the acquisition of like-kind real estate (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Real Estate Investment Trust (REIT)

A trust that invests primarily in real estate and mortgages and passes income, losses, and other tax items to its investors. REITS are typically classified as a security and are therefore not exchangeable.

Real Property

Land and buildings (improvements), including but not limited to homes, apartment buildings, shopping centers, commercial buildings, factories, condominiums, leases of 30-years or more, quarries and oil fields. All types of real property are exchangeable for all other types of real property. In general, state law determines what constitutes Real Property.

Realized Gain

Refers to a gain that is not necessarily taxed. In a successful exchange the gain is realized but not recognized and therefore not taxed.

Recognized Gain

Refers to the amount of gain which is subject to tax when property is disposed of at a gain or profit in a taxable transfer.

Related Person

Any person bearing a relationship to the Exchangor as described in Section 267(b) of the Internal Revenue Code. Related parties include family members (spouses, children, siblings, parents or grandparents but not aunts, uncles, cousins or ex-spouses) and a corporation in which you have more than a 50% ownership; or a partnership or two partnerships in which you directly or indirectly own more a 50% share of the capital or profits.

Relinquished Property

The property that the taxpayer begins the exchange with. This is the property that he or she wishes to dispose of in the exchange. Also referred to as the sale, exchange, ‘downleg’ or‘ Phase I’ property.

Replacement Property

The property that the taxpayer ends the exchange with. This property, usually owned by the seller, is the property that the taxpayer acquires in the exchange. Also referred to as the purchase, target, upleg or‘ Phase II’ property.

Reverse Exchange

A tax-deferred, like-kind exchange transaction whereby the replacement property is acquired first and the disposition of the relinquished property occurs at a later date.

Safe Harbors

The Treasury Regulations provide certain Safe Harbors that assist Qualified Intermediaries and Exchangors in structuring tax-deferred, like-kind exchange transactions so they can be assured that no constructive receipt issues will be encountered during the exchange cycle.

Seller Carry-Back Financing

When the buyer of a property gives the seller of the property a note, secured by a deed of trust or mortgage. In a Section 1031 Exchange, seller carry-back financing is treated as boot, unless it is sold at a discount on the secondary market or assigned to the seller as a down payment on the replacement property.

Simultaneous Exchange

A tax-deferred, like-kind exchange transaction whereby the disposition of the relinquished property and the acquisition of the replacement property close or transfer at the same time. A Simultaneous Exchange is also referred to as a Concurrent Exchange.

Starker Exchange

Another common name for the tax-deferred, like-kind exchange transaction based on a court decision that was handed down (Starker vs. Commissioner) in 1979. The Ninth Circuit Court of Appeals eventually agreed with Starker that its delayed tax-deferred, like-kind exchange transaction did in fact constitute a valid exchange pursuant to Section 1031 of the Internal Revenue Code. This ruling set the precedent for our current day delayed exchange structures.

Straight-line Depreciation Method

A depreciation method that spreads the cost or other basis of property evenly over its estimated useful life.

Tax Basis

The tax basis in a property is equal to cost minus accumulated depreciation. When exchanging, the beginning basis is equal to the tax basis in the relinquished property, increased by any new cash (including any increase in non-recourse debt) that is paid in the acquisition of the replacement property. Tax basis is depleted through annual depreciation and increased by capital expenditure.

Tax-Deferred Exchange

The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.

Taxpayer

Also called the exchangor. The taxpayer has property and would like to exchange it for new property. While all parties in an exchange are theoretically taxpayers, this term applies to the party who expects to receive tax deferred treatment under Section 1031.

Tenancy-In-Common (TIC)

(also known as Co-Ownership of Real Estate (CORE)) a way of sharing ownership of property among two or more persons in which each tenant holds an undivided interest in the entire property, either equally or in designated interests of differing sizes. TIC/CORE investors are on deed and considered separate owners of the real estate, sharing pro rata in the income, tax benefits, and appreciation of the property, with the properties employing professional asset and property management.

Tenancy-In-Common Interest (Co-Tenancy)

A separate, undivided fractional interest in property. A tenancy-in-common interest is made up of two or more individuals, who have equal rights of possession. Co-tenants’ interests may be equal or unequal and may be created at different times and through the use of different conveyances. Each co-tenant has the right to dispose of or encumber his or her interest without the agreement of the other co-tenants. He or she cannot, however, encumber the entire property without the consent of all of the co-tenants. In an IRS Section 1031 Exchange, an exchangor may acquire a tenancy-in-common interest with one or more other investors, as his or her like-kind replacement property.

Titleholder

The entity that owns/holds title to property. In an IRS Section 1031 Exchange, the titleholder of the relinquished property must generally be the same as the titleholder of the replacement property. If a taxpayer dies prior to the acquisition of the replacement property, his or her estate may complete the exchange. When the acquisition and disposition entities bear the same taxpayer identification numbers, such as disregarded entities (single-member LLCs and Revocable Living Trusts), the exchange usually qualifies.

Transaction Costs

Any cash paid by way of commission or other expense in an exchange. Transaction costs are deducted in computing the consideration received.

Transfer Tax

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.

Trust

An arrangement whereby property is transferred to a third party (called the Trustee) by a grantor (called the Trustor). The trustee holds the property for the benefit of the Beneficiary.