1031 Exchange Terms

Assignment:

A transfer to another of property, real or personal, or of any rights or estates in said property. Common assignments are leases, mortgages, deeds of trust, but the general term encompasses all transfers of title.

Actual Receipt:

When the exchanger receives the proceeds from the sale of their property, they have actual receipt of the funds.

Adjusted Basis:

Calculated by taking the original basis and adding the following: (1) capitalized carrying expenses, (2) capital improvements, (3) acquisitions; then subtracting the following: (4) cost recovery (depreciation, amortization, depletion) (5) un-reimbursed casualty losses and (6) dividends.

Assignment Agreement:

This document transfers contractual rights, (but not necessarily obligations) to a third party, (intermediary) and is used to assign the Buy/Sell Agreement/Purchase Contract. The cooperation of the consenting party, (either buyer or seller) is requested but not required to allow the assignment of the contract, unless the contract specifically states it is not assignable.

Basis:

Commonly referred to as the original purchase price of a property. Property received by gift, inheritance or in some way received without a purchase has a basis equivalent to the fair market value at the time it was received.

Capital Gain:

The excess of the amount realized from the sale or exchange over the adjusted basis of the relinquished property.

Closing Statement:

The statement which lists the financial settlement between a buyer and seller, or exchanger and intermediary. May also be referred to as a “HUD” statement,

Concurrent Exchange:

See “Simultaneous Exchange”

Deeding:

Sequential Deeding:

Title, (deeds) to the property pass from the principals to the intermediary and then to the ultimate owners.

Direct Deeding:

Title passes directly from the exchanger to the buyer of the relinquished property or from seller of the replacement property without passing through the intermediary

Delayed Exchange:

A tax deferred exchange where the replacement property is not closing at the time the exchanger transfers the relinquished property.

Equity:

The market value of real property, less the amount of existing liens.

Exchange Agreement:

The Purpose of the Exchange Agreement is to establish the contractual relationship between all parties and to prevent the exchanger from having constructive receipt of cash proceeds.

Installment Sale:

A tax term which is used to describe the method of reporting income. Installment reporting allows the reporting of income in the year it is received as opposed to reporting an entire gain as in the case of some carry-back financing used in exchanges.

Phase One:

Describes the transfer of property from the exchanger to the intermediary and from the intermediary to the ultimate buyer. Phase one property can also be called “relinquished property” or “down-leg”.

Phase Two:

Describes the transfer of property from the seller to the intermediary and from the intermediary to the exchanger. Phase Two property is also called the “replacement property” or the “up leg”.

Recapture:

Recognition as ordinary income of gains created by accelerated depreciation, (cost recovery) deductions in excess of straight-line depreciation.

Realized Gain:

Refers to the capital gain or loss that is not necessarily taxable. Gain or loss in an exchange may be realized but not recognized.

Recognized Gain:

That portion, if any, of the realized gain that is taxable.

Relinquished Property:

Property disposed of by the exchanger. Phase One property.

Replacement Property:

Property to be acquired to complete the exchange. Phase Two property.

Simultaneous Exchange (Concurrent Exchange):

When both the relinquished property and the replacement property closes escrow concurrently.

Strawman:

Sometimes incorrectly used to describe an Intermediary. A strawman actually describes an agent for the exchanger. It is used incorrectly if it is meant to describe an independent party acting to cooperate with the exchanger in effectuating a tax-deferred exchange in favor of the exchanger.

Unrecognized Gain:

That portion, if any, of the realized gain that is not taxable. Also called the deferred gain.

Finance Glossary