61 terms · 10 categories. Plain-English definitions of the exchange, structure, tax, and performance terms used across this site.
Exchanges
1031, 721 & Opportunity Zones
- 1031 exchange
- A swap of investment real estate for like-kind real property under IRC Section 1031 that defers capital-gains tax and depreciation recapture.
- Like-kind property
- Real property held for investment or business use that can be exchanged for other such real property under Section 1031.
- 45-day identification
- The window, from the sale of the relinquished property, to formally identify replacement property in writing.
- 180-day closing
- The window to acquire the identified replacement property; runs concurrently with the 45-day clock.
- Qualified intermediary (QI)
- An independent party that holds exchange proceeds so the investor never takes receipt of funds.
- Boot
- Non-like-kind value (cash or unreplaced debt) received in an exchange; it is taxable.
- 721 exchange (UPREIT)
- Contributing property or DST interests to a REIT operating partnership for OP units, deferring gain under IRC Section 721.
- Opportunity Zone / QOF
- A program letting investors defer tax by reinvesting capital gains into a Qualified Opportunity Fund, with 10-year appreciation potentially tax-free.
Structures
DSTs, TICs & REITs
- Delaware Statutory Trust (DST)
- A trust that holds title to real estate and lets many investors own fractional beneficial interests treated as like-kind property for 1031 purposes.
- Beneficial interest
- An investor's ownership share in a DST; treated by the IRS as a direct interest in real property.
- Rev. Rul. 2004-86
- The 2004 IRS ruling confirming a properly structured DST interest qualifies as 1031 replacement property.
- Tenant-in-common (TIC)
- A co-ownership structure (maximum 35 investors) that preceded the DST as a 1031 vehicle.
- REIT
- A Real Estate Investment Trust that owns income-producing real estate and distributes at least 90% of taxable income to shareholders.
- Non-recourse debt
- Loan secured only by the property; the lender cannot pursue investors personally, satisfying the 1031 debt-replacement rule.
- PPM
- Private placement memorandum — the offering document with complete terms, fees, conflicts, and risk factors; it controls.
Tax & Strategy
Tax and planning terms
- Depreciation recapture
- Tax on previously claimed depreciation, also deferrable in a properly executed 1031 exchange.
- Step-up in basis
- The reset of an asset's tax basis to fair market value at the owner's death, potentially eliminating deferred gain for heirs.
- Depletion allowance
- A deduction that shelters part of mineral-royalty income as reserves are produced.
- Accredited investor
- A person or entity meeting SEC Rule 501 income, net-worth, or license criteria, eligible for private placements.
- Debt replacement
- Reinvesting equal or greater debt (or adding cash) to avoid taxable boot in a 1031 exchange.
Performance
Track-record terms
- Full-cycle (realized)
- A program acquired, operated, and sold, so the total investor return is known. Active programs are excluded from realized averages.
- Average annual return
- Annualized total return across a sponsor's full-cycle programs, net of fees, as the sponsor reports it.
- Equity multiple (×)
- Total cash returned divided by equity invested; 1.8× means $1.00 returned $1.80 over the hold.
- Hold period
- Time from a program's acquisition to its exit, in years.
- Success rate
- Share of full-cycle programs that returned at least an investor's original equity.
- Survivorship bias
- The distortion from measuring only realized programs, excluding active or troubled ones.
DST Mechanics
Inside a Delaware Statutory Trust
- Master tenant
- An entity that leases the entire DST property and operates it, paying rent to the trust under a master lease — the structure that keeps the DST passive under IRS rules.
- Master lease
- The lease between the DST and the master tenant that channels property income to investors while preserving the trust's limited, passive role.
- Springing LLC
- A standby structure that lets a DST convert to an LLC if an emergency (such as a needed refinance) arises that the DST's strict rules otherwise prohibit.
- Seven deadly sins
- The IRS restrictions on a DST trustee — no new capital, no renegotiating leases or debt, no reinvesting sale proceeds, limited reserves, and more — that keep the interest 1031-eligible.
- Reserves
- Cash a DST sets aside for capital expenditures and contingencies; because the trust can't raise new capital, reserve adequacy matters.
- Sponsor
- The firm that acquires the real estate, structures the DST, and manages the program through its full cycle.
- Cash-on-cash return
- Annual cash distributions divided by invested equity — the current income yield, before appreciation.
- Loan-to-value (LTV)
- Debt as a percentage of property value; higher LTV adds leverage and risk and affects 1031 debt replacement.
Fees & Costs
What you pay, and to whom
- Load (total fees)
- All upfront offering costs — selling commissions, organization and offering expenses, and acquisition fees — expressed as a percentage of the raise.
- Selling commission
- Compensation paid to the broker-dealer and representative, disclosed in the PPM and typically paid by the sponsor out of the offering.
- Acquisition fee
- A fee the sponsor charges for sourcing and acquiring the property.
- Asset management fee
- An ongoing fee for managing the investment over the hold period.
- Disposition fee
- A fee paid to the sponsor when the property is sold at full cycle.
Mineral & Royalty
Oil, gas & royalty terms
- Royalty interest
- A right to a share of production revenue from minerals, free of the costs of drilling and operating.
- Working interest
- An ownership stake that shares in both the revenue and the costs and liabilities of oil-and-gas operations.
- Overriding royalty interest (ORRI)
- A royalty carved out of the working interest that ends when the underlying lease terminates.
- Net profits interest (NPI)
- A share of net profits from production after costs, rather than of gross revenue.
- Depletion
- The using-up of a mineral reserve as it is produced; the depletion allowance shelters part of royalty income from tax.
Opportunity Zones
QOF program terms
- Qualified Opportunity Fund (QOF)
- An investment vehicle that deploys capital gains into Opportunity Zone property for tax deferral and potential exclusion.
- Qualified Opportunity Zone Business (QOZB)
- An operating business within an Opportunity Zone that a QOF can invest in, subject to asset and income tests.
- Substantial improvement
- The requirement to roughly double a building's basis within 30 months for it to qualify for Opportunity Zone benefits.
- 10-year exclusion
- Holding a QOF investment for at least ten years can make post-investment appreciation free of capital-gains tax.
- 90% asset test
- A QOF must hold at least 90% of its assets in qualifying Opportunity Zone property.
REIT Terms
REIT analysis terms
- FFO (funds from operations)
- A REIT earnings measure that adds depreciation back to net income — a better proxy for cash earnings than GAAP profit.
- AFFO
- Adjusted funds from operations: FFO less recurring capital expenditures and straight-line rent adjustments.
- NAV (net asset value)
- The estimated market value of a REIT's assets minus its liabilities, expressed per share.
- Non-traded REIT
- A REIT not listed on an exchange; valued periodically and far less liquid than a publicly traded REIT.
- Operating partnership (OP) units
- Partnership units received in a 721 exchange that are convertible, over time, into REIT shares.
- UPREIT
- An umbrella partnership REIT structure that lets owners contribute property for OP units and defer gain.
Suitability & Regulatory
Offering & compliance terms
- Regulation D
- The SEC framework permitting private securities offerings without full public registration.
- Rule 506(b)
- A Reg D exemption allowing sales to accredited investors with a pre-existing relationship and no general solicitation.
- Rule 506(c)
- A Reg D exemption permitting general solicitation but requiring verification of each investor's accredited status.
- Regulation Best Interest (Reg BI)
- The SEC standard requiring broker-dealers to act in a retail customer's best interest when recommending securities.
- Form CRS
- The Client/Customer Relationship Summary a firm provides describing its services, fees, conflicts, and standard of conduct.
- Suitability
- The determination that an investment fits an investor's objectives, finances, and risk tolerance before any recommendation is made.
Definitions are general and educational, not tax or legal advice. Securities offered through Aurora Securities, Inc. (ASI) — CRD #46147, SEC #8-51322 — member FINRA/SIPC. Gerald F. 'Jerry' Baker, III is a registered representative of ASI (FINRA CRD #7537416). Baker 1031 Investments, LLC is independent of ASI and is not a registered broker-dealer or investment adviser. This page is informational only and is not an offer to sell or a solicitation of an offer to buy any security, or tax or legal advice; any offer is made solely through a sponsor's private placement memorandum following a suitability determination. DST and related securities are speculative and illiquid, for accredited investors only, and involve substantial risk including possible loss of principal.
Current-law source reviewed July 11, 2026: IRS Opportunity Zone guidance and IRS Notice 2026-40. Opportunity Zone benefits are conditional, time-sensitive, and dependent on the QOF, the taxpayer, the holding period, and current law; confirm the details with your CPA and attorney.