Understanding the Terms When it Comes to a 1031 Exchange

Understanding the Terms When it Comes to a 1031 Exchange

When it comes to a 1031 Exchange, there can be a wide variety of terms used, which can get confusing at times. We’ve compiled a list of some of the basics:

  • Sponsor: A person who directly or indirectly provides management services for a program.
  • Boot: Any funds remaining in the form of cash or debt from the property sold. The excess proceeds are fully taxable back to the exchanger’s original cost basis.
  • Accredited Investor: 1 Anyone who has earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence) On the income test, the person must satisfy the thresholds for the three years consistently either alone or with a spouse, and cannot, for example, satisfy one year based on individual income and the next two years based on joint income with a spouse. The only exception is if a person is married within this period, in which case the person may satisfy the threshold on the basis of joint income for the years during which the person was married and on the basis of individual income for the other years. In addition, entities such as banks, partnerships, corporations, nonprofits and trusts may be accredited investors. Of the entities that would be considered accredited investors and depending on your circumstances, the following may be relevant to you:any trust, with total assets in excess of $5 million, not formed to specifically purchase the subject securities, whose purchase is directed by a sophisticated person,  or any entity in which all of the equity owners are accredited investors.
  • Identification Period: The first time period in a 1031 exchange. Beginning the day the exchanger closes on the relinquished property, a 45-day clock begins to tick.
  • Exchange Period: The deadline that begins on closing day. The exchanger will have a total of 180-days from closing on the relinquished property to acquire the replacement property.
  • Qualified Intermediary (QI): An independent third party not related to the taxpayer and with no financial interest in the exchange.
  • Reverse Exchange: When the exchanger finds the property in which he or she wants to own prior to selling their relinquished property.
  • Like-Kind Property: The IRS has identified as it relates to investment real estate, all real property is like-kind property to one another provided it was used for investment purposes.

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Please note: 1031RPS.com and its associated personnel are not tax professionals, and they recommend investors consult with their tax advisor to ensure their 1031 Exchange is within the IRS guidelines established.