1031 Exchange
The tax deferred sale and purchase of like-kind properties for the benefit of deferred gain treatment.  A 1031 property exchange enables you to sell your property without having to pay taxes on the gain.  The taxes are deferred if you conduct a 1031 tax exchange.

Boot- Cash or mortgage relief received in exchange, resulting in a taxable gain. See the section on Do's and Don't for a 1031 exchange program.  Your goal is to avoid any taxable gain.

Closing -The transfer of title of real property in a real estate transaction.

Exchange Equity -The cash and/or other property available at the time of closing on the sale of the relinquished property.  

Exchange Period -The 180-day period beginning on the day property is relinquished, closed and sold,  and ending at midnight on the 180th day in which 1031 replacement property must be acquired.

Identification Period -The 45-day period that you must identify properties to purchase or replace the property that was sold.  The 45 day period begins on the day the property is relinquished  or sold.

In-Cash -The status when an investor has closed escrow on the relinquished property and is in the 45-day identification period of the IRS 1031 exchange program.

A Intermediary holds the money from the relinquished property’s sale while it is waiting to be reinvested into the replacement property.  This can be an attorney, accountant, escrow company or a Qualified Intermediary Company, see below.

Like-Kind Exchange
Like-kind is defined in the tax code as meaning “similar in nature or character, notwithstanding differences in quality or grade”. A person must re-invest the proceeds from the sale of a property into a “like-kind” replacement property; that is why it is called an exchange. This does not mean that one can only exchange a rental home for another rental home, or an office building for another office building. “Like-kind” simply means that both properties have to be for investment or for productive use in business or trade. So while that would generally rule out a primary residence, a wide variety of other properties could qualify, including office buildings, apartments, retail, land, and properties that involve oil, gas, and mineral investment opportunities.   All of these are considered 1031 replacement properties.

Master Lease
Master lease structures can be the vehicle used in 1031 exchange programs. In a master lease program, the sponsors create a master lease. Usually, this is the sponsor or sponsor-affiliated company that agrees to pay a lease payment to the 1031 exchange investors at a set rate. This is the guaranteed rate. The owners of the master lease then sublease to the tenants in the investment. They collect the rents, they handle the day-to-day matters, and handle the lease obligations related to operating the building or investment. The owners of the 1031 property exchange would benefit from a master lease because they only have one tenant, the master lessee, to deal with. The master lessee is responsible for the management, repairs, taxes, assessments, and insurance. This is commonly referred to as triple net lease. The structure requires the owners of the property to receive their rent due on time from the master lessee.

Qualified Intermediary
Another requirement is that the investor use a “qualified intermediary”. A qualified intermediary (QI) hold proceeds of sale for the benefit of the buyer and seller, or acts as an escrow agent or trust fund holder. A QI is a disinterested third party who holds the funds from the relinquished property, and then releases the funds for the replacement property acquisition. Although the Treasury Regulations use the term “Qualified Intermediary”, some companies use the term “facilitator” or “accommodator”. The QI will deposit the sale proceeds into his/her escrow or trust account and distribute the proceeds to the seller of the new property, assure that all documents are in order for the exchange. Qualified Intermediaries are not regulated or licensed, so it is important to work with one who has fidelity bonds, errors and omissions insurance and who is very knowledgeable in this area. Many times the Qualified Intermediary is providing technical assistance to make sure that everything goes right, although they specifically will not offer legal or tax advice.   Contact us with your questions.

Relinquished Property
Investment property sold as part of an 1031 property exchange.

Replacement Property
Investment property acquired as part of an 1031 tax exchange.

Section 1031 of the IRS Code
The authorizing section of the IRS 1031 exchange tax code that allows an investment property owner to defer capital gains. See the entire section of the code related to 1031 tax exchanges on this website.

Time Constraints
An exchange must identify the replacement property within forty-five days and close on it within 180 days. The clock starts ticking as soon as the relinquished property is sold. see definitions above.

Triple Net Lease, NNN
A triple net lease requires the tenant to pay the taxes, maintainance, and insurance.  From the investors point of view it means that the investor has no responsibility for the expenses subject to the investors responsibility of ownership.  There is also the risk of tenant default.

100% Reinvestment
An investor must buy a 1031 exchange property of equal or greater value. To defer all of the capital gains tax, a real estate owner is required to reinvest all of the equity in the 1031 replacement property and acquire equal or greater debt.