Many people are familiar with the basic concept of a tax deferred exchange under Internal Revenue Code Section 1031. But at the same time, it is easy to get lost in the specialized terminology used in this area of the law. Like many other specialized fields, tax deferred exchanges and their practitioners have their own "short hand" and terms of art used to convey special meaning. The following are some of the commonly used exchange terms and phrases with a more "plain-English" definition.

 

    Boot: "Boot" is the fair market value of non-qualified (not "like-kind") property the Exchanger gives or receives in an exchange. (Examples: cash, notes, seller financing, furniture, supplies, reduction in debt obligations.) Receiving boot does not disqualify an exchange, but the boot may be taxed to the Exchanger to the extent of the recognized gain. Some types of boot received may be offset against boot given.

 

    Constructive Receipt: "Constructive Receipt" is a term referring to an Exchanger exercising control over the proceeds of a Relinquished Property, even though funds may not be directly in his possession.

 

    Exchanger: The "Exchanger" is the property owner seeking to defer capital gain tax by using an IRC §1031 exchange.

 

    Exchange Period: The "Exchange Period" is the period during which the Exchanger must acquire the exchange’s Replacement Property. The Exchange Period starts on the date the Exchanger transfers the Relinquished Property and ends on the earlier of the 180th day thereafter or the due date for the Exchanger’s tax return for the year in which the Relinquished Property was transferred (including extensions).

 

    Identification Period: The "Identification Period" is the period during which the Exchanger must identify the exchange’s Replacement Property. The Identification Period starts on the day the Exchanger transfers the Relinquished Property and ends at midnight on the 45th day thereafter (no extensions for holidays or weekends).

 

    Like-Kind Property: "Like-Kind Property" refers to the nature or character of the property, not its quality. Generally, real property is "like-kind" to all other real property as long as Exchanger intents to hold the property as an investment or for productive use in a trade or business. When applied to personal property, "like-kind" has a much more restrictive definition.

 

    Qualified Intermediary: The entity that facilitates the exchange for the Exchanger. Although the Treasury Regulations use the term "Qualified Intermediary," some companies use the term "facilitator" or "accommodator".

 

    Replacement Property: "Replacement Property" is the property acquired by the Exchanger. It sometimes is referred to as the "acquisition" property, the "target" property, or the "upleg" property.

 

    Relinquished Property: "Relinquished Property" is the property "sold" by the Exchanger. This is also sometimes referred to as the "exchange" property or the "downleg" property.