1031 Exchange Glossary of Terms

Boot is any non-like-kind value you receive — typically cash you keep or debt you don't replace. It's taxable up to the amount of your gain, even within a valid exchange.

Basis is your investment in the property for tax purposes — original cost plus improvements minus depreciation. In an exchange it carries over into the replacement property, preserving the deferred gain.

An exchange accommodation titleholder — an entity that temporarily holds (parks) title to a property in reverse and improvement exchanges, under the IRS safe harbor (Rev. Proc. 2000-37).

Both are fractional ownership used as replacement property. A DST is a trust structure with passive, sponsor-managed ownership and pre-arranged debt; a TIC is direct deeded co-ownership with voting rights and more financing complexity. DSTs are the more common modern choice.

For real estate, like-kind refers to the nature of the property as real estate, not its type or grade. Almost any U.S. investment real property is like-kind to almost any other, so you can exchange across property types.

Having access to or control over the sale proceeds, even without physically taking the cash. Constructive receipt disqualifies the exchange, which is why a qualified intermediary must hold the funds.

The relinquished property's adjusted basis carried into the replacement property rather than resetting. Because gain equals value minus basis, the old basis carries the deferred gain forward.

Contributing property (often a DST interest at full cycle) to a REIT operating partnership for OP units under Section 721, deferring gain. It's a one-way door — you generally can't 1031 back into direct real estate afterward.

The portion of gain attributable to depreciation you took, taxed up to 25% (unrecaptured Section 1250 gain) on sale. It's often the largest tax layer on a long-held rental, and a 1031 defers it.

The requirement that the taxpayer (or disregarded entity) selling the relinquished property is the one acquiring the replacement. Title must match, which complicates partnership and multi-member LLC situations.

An independent party that holds your exchange proceeds and documents the transaction so you never take constructive receipt. A QI is required for a deferred 1031 exchange and must be engaged before closing.

The 3-property rule (up to three of any value), the 200% rule (more than three within 200% of value), and the 95% exception (any number if you acquire 95% of value). They govern how you identify replacement property within 45 days.

Debt secured only by the property, without personal liability — typical of DSTs. A leveraged DST's non-recourse debt replaces your old leverage without you applying for or guaranteeing a new loan.

The reset of an asset's basis to fair-market value at the owner's death. It can eliminate the deferred gain in a 1031 chain for heirs, the basis of the 'swap till you drop' strategy.

The home-sale exclusion that excludes up to $250,000 of gain ($500,000 for married couples) on a primary residence. It's the tax break for a home, distinct from Section 1031, which is for investment property.

A DST that has completed its life cycle — the property has been sold and capital and gain returned to investors. At full cycle, investors typically take the proceeds (a taxable event unless they do another 1031) or roll into a REIT via a 721 exchange.

Realized gain is your total gain on the sale (proceeds minus adjusted basis). Recognized gain is the portion actually taxed — in an exchange, that's the boot, up to your realized gain. A fully deferred exchange has realized gain but no recognized gain.

The firm that acquires the property, structures the DST, and manages it. The sponsor's track record, fees (the load), and alignment are key to diligence, since DST investors depend on the sponsor's management and integrity.

The PPM is the disclosure document under which a DST or other private placement is offered to accredited investors. It describes the property, structure, risks, fees, and projections, and is where serious diligence begins. Read its risk factors carefully.

An investor meeting SEC income or net-worth thresholds (generally over $1 million net worth excluding primary residence, or qualifying income). Accredited status is required to invest in private placements like DSTs.

Distributing tenancy-in-common interests to partners before a sale, so each partner holds direct real-property (rather than partnership) interests and can pursue a separate 1031 exchange. It carries timing and holding-period risk and must be planned with counsel.

A simple rule of thumb for full deferral: buy equal or greater in value and reinvest equal or greater equity (replacing your debt). If both 'lines' go up or stay equal, you've generally avoided boot. It's a quick mental check, not a substitute for the actual rules.

The technical name for real-property depreciation recapture — the portion of gain attributable to prior depreciation, taxed at a maximum of 25%. On a long-held rental it's often the largest tax layer, and a 1031 defers it.

A fund that can defer (and potentially reduce) capital gains reinvested into qualified opportunity zones. It's a different deferral tool from a 1031 — it can defer gain from any source by reinvesting just the gain, and can make a decade of appreciation potentially tax-free.

Short-term financing used to fund the up-front purchase of the replacement property in a reverse exchange, before your sale proceeds are available. It's repaid when the relinquished property sells and the proceeds flow through the exchange.

A loose term that can mean a qualified intermediary (holds funds), an advisor or broker-dealer (sources replacement property), or a sponsor (creates DSTs). Knowing which role you need — and that an independent advisor differs from a sponsor — helps you choose the right firm.

A single-member LLC is disregarded for tax, so its property can be exchanged by the owner (satisfying the same-taxpayer rule). A multi-member LLC or partnership is a separate taxpayer, so the entity must do the exchange — individual members can't go separate ways inside it.

This glossary covers the core terms; the deeper guides in this series define terms in context, and Baker 1031's Learning Center has additional explanations. For terms specific to your situation, your qualified intermediary and CPA can clarify how they apply to you.