Glossary

A 1031 exchange is a tax strategy in which real estate investors can sell an investment property and defer capital gains and other taxes by reinvesting the proceeds in similar properties. This method also enables portfolio diversification.

A 1033 exchange, also known as an involuntary conversion or replacement property exchange, is a provision in the U.S. tax code (Section 1033) that allows individuals and businesses to defer capital gains taxes when they involuntarily lose property, such as due to theft, destruction, or condemnation by a government authority.A 1031 exchange is voluntary and used for proactive investment property transactions, while a 1033 exchange is triggered by unexpected events and allows for tax deferral in such unfortunate circumstances.

the postponement of adjusting the cost basis of an asset, often associated with delaying the recognition of capital gains for tax purposes. This commonly occurs in like-kind exchanges, allowing the adjustment to be deferred until a later taxable event.

Boot is the taxable portion from an exchange which would be incurred under the following scenarios- property that does not qualify as like-kind exchange property, cash proceeds remaining after the exchange or received after closing on the replacement property, and relief from debt through the assumption of a mortgage that is less than the debt relinquished in the exchange. The boot, in whatever form it takes, is taxable.

the profit realized from the sale of a capital asset, such as stocks, real estate, or other investments. It is calculated by subtracting the original purchase price (or "basis") of the asset from the selling price. If the selling price is higher than the purchase price, the result is a capital gain. Capital gains can be categorized as short-term or long-term based on the holding period of the asset.

a tax imposed on the profit (capital gain) generated from the sale of a capital asset, such as stocks, real estate, or investments. The tax is applied to the difference between the sale price of the asset and its original purchase price, known as the basis. Capital gains can be categorized as either short-term or long-term based on the holding period of the asset.

AKA: community development financial institutions fund. The "CDFI Fund" is an initiative by the U.S. Department of the Treasury that supports economic and community development in underserved areas. It provides financial assistance to certified Community Development Financial Institutions (CDFIs) and other organizations, helping to increase access to capital and financial services in disadvantaged communities.

A financial metric indicating a borrower's ability to cover debt payments with income. DSCR above 1 means adequate coverage.

a capital gain that has been delayed in recognition for tax purposes. This typically occurs through strategies like a like-kind exchange, allowing individuals or businesses to postpone the payment of capital gains tax until a future taxable event.

(DST) is a legal entity used in real estate investment. It allows multiple investors to pool their resources and invest in a property, typically for the purpose of tax-advantaged 1031 exchanges. DSTs are structured under Delaware law and offer investors a way to acquire fractional ownership in real estate assets without active management responsibilities. This structure can provide tax benefits and diversification for investors in real estate.

a term often associated with a specific type of like-kind exchange in real estate, known as a "delayed 1031 exchange." In this transaction, the seller of a property (relinquished property) has the option to defer capital gains taxes by identifying a replacement property and completing the purchase within a specified timeframe.

refers to a deposit made by a buyer to demonstrate their sincere intent and commitment to purchasing a property. This deposit, typically held in an escrow account, is a sign of good faith to the seller. If the sale proceeds as planned, the earnest money is often applied toward the down payment or closing costs. However, if the deal falls through due to contingencies outlined in the contract, the earnest money may be returned to the buyer.

specified time frame in a 1031 exchange, during which a property seller must identify and acquire a replacement property to defer capital gains taxes. It usually lasts 45 days for identification and 180 days for the acquisition.

where the tenant pays a set, all-inclusive rent amount to the landlord. This rent typically covers not only the base rent for the space but also some or all of the operating expenses, such as property taxes, insurance, and maintenance costs.

a specific timeframe within a 1031 exchange, a provision in the U.S. tax code. In this context, it refers to the duration during which a property seller must formally identify potential replacement properties after selling the relinquished property. In a standard delayed exchange, the identification period is typically 45 calendar days from the sale of the relinquished property. During this period, the seller must submit in writing to a qualified intermediary the identification of the replacement properties they intend to acquire to defer capital gains taxes.

refers to real estate used for industrial purposes, such as manufacturing, warehousing, distribution, or research and development. These properties are designed and equipped to support industrial operations and typically have features like large open spaces, high ceilings, loading docks, and specialized infrastructure to accommodate industrial activities.

a tax-deferred transaction under Section 1031 of the U.S. Internal Revenue Code, allowing the exchange of certain types of property for another without immediate recognition of capital gains taxes. In this exchange, often referred to as a "1031 exchange," the relinquished property is sold, and the proceeds are used to acquire a replacement property of a similar kind. The tax on the capital gains is deferred until a future taxable event, providing a strategy for managing tax liabilities and facilitating the continued investment of funds.

refers to assets or properties of a similar nature or class, as defined by the Internal Revenue Service (IRS) in the context of a like-kind exchange under Section 1031 of the U.S. tax code. In a like-kind exchange, a property owner can sell a relinquished property and defer capital gains taxes by acquiring a replacement property of a similar kind or class. The term "like-kind" is broad and doesn't require the properties to be identical but rather similar in nature or use, providing flexibility for investors to diversify their real estate portfolios.

type of real estate that consists of multiple residential units within a single building or complex. It is designed for housing multiple families or households. Common examples include apartment buildings, condominiums, townhouses, and duplexes, where each unit is a separate living space.

financial metric used in real estate. It represents the income generated by a property from its operations, such as rental income, minus the operating expenses (e.g., property taxes, insurance, maintenance costs). NOI is a key measure of a property's profitability and is often used by real estate investors and appraisers to assess its financial performance.

a confidential document provided to potential investors in a private placement offering, including those related to 1031 investments. It contains detailed information about the investment opportunity, including its structure, risks, financial projections, and legal disclosures. Investors are required to review the PPM before participating in the offering to make informed decisions and understand the terms and risks associated with the investment.

neutral third party, often used in the context of a 1031 exchange, who facilitates the tax-deferred exchange process. Their role includes holding the proceeds from the sale of an investment property and then using those funds to acquire a replacement property, thus helping the investor meet the requirements for deferring capital gains taxes.

is a designated economically distressed community eligible for special tax incentives under the Opportunity Zone program. Investors can receive tax benefits by directing capital gains into investments within these zones, promoting economic development and job creation.

refers to the specific purpose or use of property as defined by the Internal Revenue Service (IRS) regulations, particularly in the context of tax-related transactions such as a like-kind exchange under Section 1031. For a property to qualify for certain tax benefits, it must meet the criteria of being used for a qualified purpose.

refers to a property acquired in a like-kind exchange, particularly under Section 1031 of the U.S. Internal Revenue Code. In a 1031 exchange, a property owner sells a relinquished property and uses the proceeds to acquire a replacement property of a similar kind or class. The term emphasizes that the new property is obtained as a replacement for the property sold, and the transaction allows the deferral of capital gains taxes until a future taxable event.

In a like-kind exchange, both the relinquished property and the replacement property must be held for a qualified use. Generally, this involves using the properties for business or investment purposes rather than personal use. Ensuring that the use of the properties meets the IRS's criteria is crucial for eligibility for tax-deferred treatment in transactions like a 1031 exchange.

a method of pooling financial resources from multiple investors to collectively invest in real estate properties. This strategy allows individual investors to participate in real estate ventures that might be beyond their individual financial capacity. Typically, a sponsor or lead investor manages the property and the investment, while the other investors contribute capital. 

real estate or investment property that an individual or entity intends to sell as part of a 1031 exchange. In the context of a 1031 exchange, the relinquished property is the asset being sold, and the seller plans to use the proceeds to acquire a like-kind replacement property. This process allows the seller to defer capital gains taxes and potentially other taxes on the sale, provided they adhere to the IRS regulations governing 1031 exchanges.

a type of like-kind exchange under Section 1031 of the U.S. Internal Revenue Code. In a reverse exchange, the replacement property is acquired before the relinquished property is sold. This is the opposite of a typical like-kind exchange, where the relinquished property is sold first.

refers to a section of the U.S. Internal Revenue Code that outlines rules for like-kind exchanges. Specifically, Section 1031 allows property owners to defer capital gains taxes when they sell a property used for business or investment purposes and use the proceeds to acquire a similar or like-kind property. The tax on the capital gains is deferred until a future taxable event, providing an opportunity for investors to reinvest in other properties without an immediate tax liability. The rules and requirements outlined in Section 1031 must be carefully followed to qualify for these tax benefits.

also known as a "Starker Delayed Exchange," is a type of like-kind exchange under Section 1031 of the U.S. Internal Revenue Code. In a Starker Exchange, the seller of a property (relinquished property) identifies a replacement property but does not immediately acquire it. Instead, a qualified intermediary holds the sale proceeds, and the seller has a specific timeframe to acquire the replacement property.

refers to a financial strategy or arrangement where the payment of taxes on income or capital gains is postponed to a future date. In a tax-deferred scenario, individuals or businesses can delay the recognition and payment of taxes, allowing them to retain and reinvest the funds in the interim.