The Language of 1031 Exchange

The Language of 1031 Exchange

Language is a powerful thing — so much so that being well-versed in the parlance of a given field is absolutely necessary for success.

Think about it. Would you expect to have a coherent conversation with your surgeon about an upcoming procedure if you didn’t know the names of your body parts? Of course not! The same holds true for complex financial procedures such as the 1031 Exchange, where you will want to know the specific definitions of words and phrases. After all, it’s your money that’s on the line!

So here are some important definitions / descriptions related to the 1031 Exchange process; knowing these will enable you to avoid finding yourself at a linguistic disadvantage when it comes to performing one.

Definitions Related to the 1031 Exchange Process

1031 Exchange: A 1031 Exchange refers to the “swapping” of one investment, asset or business for another, with the majority involving real estate transactions. While in other instances this practice would be taxable as a sale (and you would pay it immediately), this provision allows investors to defer them — legally — instead. With this practice, the property you exchange for (i.e. the one you’re giving up) is relinquished prior to the acquisition of your new property.

Like-Kind Property: Your ability to perform a 1031 Exchange depends on whether or not what you’re exchanging for is of “like kind” in relation to what you’re giving up. Properties that have the same / similar nature and / or character (regardless of differences in grade or quality) generally meet this description. Remember though, as it regards to personal property, the definition of “like-kind” becomes much more restrictive.

Exchanger: The property owner who is seeking to defer his / her capital gain other income tax via utilizing an IRC 1031 Exchange.

Relinquished Property: The “old” property that is being divested or sold by the exchanger / investor.

Replacement Property: The “new” property that is being acquired or  purchased by the exchanger / investor.

Qualified Intermediary: The person or entity that facilitates the exchange for the exchanger / investor. Similarly used terms include exchange facilitator and exchange accommodator. Note that to become a qualified intermediary, the exchange facilitator must meet the criteria spelled out in Treas. Reg. 1.1031(k)-1(g)(4)

Exchange Period: The period during which the exchanger / investor must acquire the replacement property in the exchange; it starts on the date the relinquished property is transferred and ends on the earlier of these: 180 days after this action or the exchanger’s tax return due date (including extensions) for the year of the relinquished property transfer.