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1031 TERMS - A Dictionary
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1031 Buyer Representation: A real estate brokerage company with expertise in 1031 Exchanges whose sole function is to represent the interests of the 1031 buyer as opposed to the property broker who has a fiduciary responsibility to the seller.
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.
Basis: The starting point for determining gain or loss in any transaction. In general, basis is the cost of the taxpayer's property.
Basis in the Replacement Property: In an exchange, the deferral of the tax on the gain is accomplished by requiring the taxpayer to carryover (substitute) the basis of the relinquished property to the replacement property with appropriate adjustments in the event additional consideration is paid. See Deferral.
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.
Buyer: The person who wants to acquire the exchanger's property. In a three- or four-party exchange, the buyer usually has cash.
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, either in the form of cash or debt.
Depreciation Recapture: Exchanges of like-kind property ordinarily do not trigger any depreciation recapture (that is, deductions taken in excess of straight-line depreciation under Section 1250 I.R.C.). Where there is an exchange into a property of lower value, or where the exchange consists partly of cash and property not of a like -kind, consideration must be given to the depreciation recapture provisions of Section 1250 and the higher capital gain tax rates for depreciation recapture.
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.
Intermediary: The party who facilitates a tax deferred exchange by acquiring and selling property in an exchange. The intermediary plays a role in almost all exchanges today. He or she neither begins nor ends the transaction with any property. He or she buys and then resells the properties in return for a fee.
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.
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
Seller: In a three - or four-party exchange, the person who owns the property that the taxpayer wants to acquire in the exchange.
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.
Transaction Costs: Any cash paid by way of commission or other expense in an exchange. Transaction costs are deducted in computing the consideration received.
1033 Tax Exchange: An exchange based on evidence other than the actual property. For instance, in the event of destruction by fire the insurance settlement would suffice as the property exchange.
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