Tulsa Commercial Real Estate Experts - The 1031 Exchange Glossary of Terms

Tulsa Commercial Real Estate Experts - The 1031 Exchange Glossary of Terms
by U.S. SBA Entrepreneur of the Year & Cofounder of Fears & Clark Tulsa Commercial Real Estate Group - Clay Clark
The 1031 Exchange can be a very complicated tax deferral "move" and thus I have put together the following glossary of the terms relating to this process. While reading this article you will find the definitions of the terms that are most commonly used in the vast and complicated world of the 1031 Exchange Program. Towards the end of the article I will also go one to describe various other definitions that I think are important but that do not related to the world of the 1031 Exchange Program. I will include these additional bonus definitions to keep my sanity, and to potentially make you laugh.
1031 Exchange - The 1031 Tax Deferral "move" allows taxpayers to deferr their taxes when they sell a piece of real estate if they choose to use the funds and the profits towards the purchase of another property of greater or equal value with 180 days of the selling of their property.
Boot - A Shoe.
Boot - The property that a tax payer receives in the exchange which actually does not qualify as the "like-kind property." The cash proceeds are the most significant and the most common form of the "boot." Boot is subject to taxation. Sometimes we all just have to throw off our shoes.
An Exchanger - A woman who returns all of her gifts after the holidays for gifts of greater or equal value to her.
Construction Receipt - When you leave Home Depot they will usually give you a Construction Receipt, but that is not the type that we are talking about here. The term Construction Receipt refers to the person who is the Exchanger having nearly unlimited control of the equity from the property that is sold. A Constructive Receipt will invalidate a tax deferred exchange.
A Contract Exchange - A Contract Exchange is term used to refer to the tax-deferred property swap of the buyer's individual ownership in a sales contract on real property for different real property of fora contract or even an option on different real property or the Option Holder's opportunity to exchange an Option to purchase the real property, for different real property, or for an incredible option or a contract on different various real property. Basically my reader friend, a contract exchange is an exchange of an open options to purchase or an open Sales Contract, as opposed to an exchange of the real estate in question itself. If you have no idea what I am referring ot here, you are not alone.
A Cooperation Clause - This is Santa's cooperative brother.
An Exchange Accomodation Taxpayer - This legal entity is the LLC that is formed to be used during the 1031 Exchange process. Oh it is nice.
The Identification Period - This is the time period that actually starts with the close-of-escrow of the property that has been relinquished. During this exciting 45-period, the exchanger must quickly identify the replacement property in order to keep the ball rolling as it relates to the section 1031 exchange transaction.
The Exchange Period - This is that 180-day window of time that is setup by the government for the exchanger to complete a tax deferred exchange. If the process gets held up and the exchange is not completed within 180 days then his person is probably going to be a little frustrated with the huge amounts of capital gains taxes that they will find themselves owing.
Fair Market Value - This is the price of piece of property as determined by the market around them, the location of the property, the condition of the property and various other economic factors. I usually do not agree with the Fair Market Value on anything, because something is only worth what someone else is willing to pay for it.
Identification Removal - This is that time when people rip the tag off of their mattress.
Exchange Funds Account - This is the incredible bank account that is established by the qualified intermediary to keep the exchange funds until the exchange is completed. Often times if you ask the ladies at the bank nicely, they will give you a sucker. Hold out for the cherry or grape flavors, they are the best and everyone knows it.
A Taxpayer - This is person with a pulse living within the United States who decides not to pursue unemployment as his primary method of maintaing sustenance.
The 20-Second Rule - If a man drops an item of food on the ground, then another man cannot judge him if he picks up and eats the food item within 20 seconds of its initial contact with the floor.
Original Basis - This refers to the original pruchase price of the property. It is used to figure out the capital gains or the losses for the purposes of taxation.
Personal Property - This is any property that belongs to the human who is the exchanger that is non-real estate related, like a person's snow cone collection.
200% Percent Rule - This rule refers to the Exchanger identifying more than three properties. This can happen only if their combined value is not equal to more than 200% of the Relinquished Property.
Phase 2 - This is terrible process in which the replacement property is then bough and then all of that terrible and God-forsaken paperwork that comes after the sell of the property. This process is often times called the "up leg" and I do not agree with this nick-name. I prefer to call this part of the process the "slam."
Real Estate Exchange - This is some good stuff. The Real Estate Exchange involves the exchange of real proerty for real property. None of that "bogus" property can be used here. All types of real property are considered to be like-kind so this great and this includes raw land, commercial properties, residential properties and even crazy-long term leases.
Replacement Property - This is the new property that the person wishing to participate in the 1031 Exchange Program will purchase after they sell their Relinquished Property.
Reverse Exchanges - This is the type of glorious exchange in which the Replacement Property is purchased before the actual Relinquished Property is sold. This move is "classic."
Rules of Indentification - There are strict guidelines that must be observed and followed when making the 1031 Exchange program. Some of these rules include the Three Property Rule, the 95% Rule, and the 200% Percent Rule. For more information about these rules, just use the Google.
The Settlement Agent - This is the title agent, escrow officer, the closing agent, the closing attorney, the closing officer, or the settlement attorney. All of these people sound like great people.
Qualified Intermediary - This is human that will serve as the accomodator, the qualified escrow holder, the man, the intermediary, the point man, the QI. This third party helps make the exchange happen, and this person is needed to get this type of deal done.
Tax Deferred Exchange Defintition:
The fabulous concept outlined by Internal Revenue Code Section 1031 that involves a series of rules and regulations that must be met in order to take full advantage of deferring capital gains tax on the sale of investment real estate.
95% Percent Rule - This rule is all about the Exchanger being able to identify a number of properties without really having much regard for their value as long as the Exchanger purchases 95% of the fair market value of the properties that he has identified.
Identification Removal - This identification removal form is the used to actually remove the previously identified Replacement Property with that limited amount of time known as the 45 day Indentification Period.
Tenancy In Common (TIC) - This relates to fractional ownership interest in various properties. Some humans own an interest in a property rather than owning an entire piece of property.
Phase 1 - This is the phase that generally comes before phase 2. This is also the process of relinquishing the property went it is sold and all of that incredibly respective paper work for that must be completed to make this process conclude. This process is also known by some people as the "down-leg" of the tax deferral exchange program. I personally call it the "up dog."
The Indentification Period - This is amount of time needed to remember someone whom you have met five or six times this month at church but whose name you cannot remember for the life of you.
Napkin Rule - This rule relates to the rule that you must buy a replacement property of equal or greater value to the Relinquished Property in order to qualify for the 1031 Exchange. Talking more about this rule is not a good idea, because there are so many technicalities associated with it, that it is truly amazing. Just remember this. If you want to qualify, you must use all of the proceeds from the sell of one property for the purchase of another property of greater or equal value.
Tax Advisor - This is someone other than your Uncle Larry "who knows a little something about not paying the man too much." This persona is an accountant, a CPA, a financial advisor or a tax attorney.
Like-Kind Personal Property - When dealing with personal property the code is very tough. The "Like Kind" rules are much more restrictive on personal property exchanges. Just as an example, if you were to go out there an exchange lawn mower you would have to exchange that lawn mower for another lawn mower. You couldn't exchange a riding lawn mower for a small car. Where in real estate, you could exchange a house for a farm, or a farm for a retail shopping center. Consult a tax professional to make sense of this madness.
Like-Kind Property - The properties that are involved in the tax deferred exchange must have similar characteristics. Like-kind real estate property is very odd. Like-kind real estate property is basically any kind of real estate that isn't the place you call home or second home.
Relinquished Property - This is property that is being sold by the person wishing to participate in the 1031 Exchange Program.
IRS - A group of fun individuals who spend their entire working lives pursuing your hard earned revenue that can be seized in the form of taxes.
Capital Gain - Capital gain is actually calculated as follows: you have to take the selling price of the relinquished property, less the specific exchange expenses, less the relinquieshed property's adjusted basis. Confused yet? The adjusted basis is the original cost of the property plus the cost of improvements, minus the depreciation or cost recovery deductions. Capital gains may also be subject to the depreciation recapture laws and other various exciting rules of the internal revenue service. I just love those guys.
Indentification Statement - This is statement used to state potential replacement properties that will be purchased as part of the 1031 Exchange program.
A Cooperative Clause - This clause is added to a sales agreement or purchase agreement that requires a person who is not the official exchanger to use his best efforts (not his weakest efforts) to assist the exchanger in the consummating (not within the context of marriage) of a 1031 tax deferred exchange.
Adjusted Basis - This term is a great term. This term means that the purchase agreement, the sale agreement and the earnest money agreement, and the offer and the acceptance, and the real estate contract, and the other contract comtemplating and mentally marinating on the purchase or sale of real (as opposed to fake) property.
Construction Exchange - If you are feeling the need, you may purchase a replacement property that is not yet built however you have better make sure that the improvements on property are completed before the expiration of the 180 days. You had better be working with X-Men style contractors that actually hit their deadlines or you are going to get hosed here. In a Construction Exchange, the property that is held but be held by a specially formed LLC called the Exchange Accommodation Taxpayer. A Construction Exchange nearly always has a much greater complexity and fees than a 1031 Exchange. It hurts my head just to write about it.
The Forward Delayed Exchange - This type of echange occurs when a specific property is sold using the exchange of monies and then another piece of property is purchased quickly within 180s days following the sale of the relinquished property.
Three Property Rule - The Exchanger may choose up to three properties that he has his eye on without really having any regard for their value.
A Cold-Hearted Snake - In the late 1980s Paul Abdul recorded a song entitled, "Cold Hearted Snake." The song was used to call out men who did not treat women well in the context of a dating relationship. This song was marginal, yet is somehow found its way into the top 40 because it was pushed hard by fans who loved her song, "Straight Up" which was a legit top 40 song. I'm glad I cleared that up.
An Exchanger - This person is the owner of an investment property who is trying to make a tax deferred exchange. This person cannot be a human looking to defer capital gains taxes for the purchases of a "second home." Doing this would be a party foul.
For more information about the 1031 exchange program, purchasing Tulsa commercial real estate, Tulsa commercial real estate, Tulsa commercial office buildings, Tulsa office buildings, Tulsa real estate, Tulsa office space, Tulsa commercial space available and Tulsa commercial investment properties please feel free to contact our expert team of commercial real estate professionals today at 918-481-2080. Or you can visit us online at www.FearsClark.com.