Full Service Accommodator/Qualified intermediary “QI”- A neutral third party that has no financial or economic interest in the property that usually is bonded who acts specifically as a facilitator to transfer the property while adhering to the rules and regulations of the IRS 1031 code. They also assist with tax, legal, and/or accounting recommendations.
BOOT– The residual amount of cash, notes, or any consideration left over after the 1031 exchange has been completed
Disqualified Party-Typically anyone who performed services for the seller of the property who acted in the capacity of attorney, accountant, real estate broker/agent, investment banker, or taxpayer’s employee, within the two year time frame ending on the date of the transfer of the relinquished property
Exchange Agreement-An agreement to exchange the relinquished property whereby the intent, terms and conditions of the real estate transaction, and the required actions of the Accommodator and the Exchanger are clearly detailed
Related Party-Any party that is related to the Exchanger/taxpayer (Section 267 (b) or 707(b)(1)
1031 Tax Deferred Exchange– This refers to Code Section 1031 which permits an owner of income property held for investment to sell it and defer the taxes if a like kind investment property is identified within 45 days of the close of escrow of the relinquished property and escrow is closed within 180 days of the close of escrow of the property that was sold.
Exchanger– An exchanger is an owner of an investment property who sells his property with the intent of successfully completing a 1031 tax deferred exchange into another property (any property other that a personal residence).
Relinquished Property-This is an investment property sold by the owner for the purpose of completing a 1031 Tax Deferred Exchange.
1031 Safe Harbor Regulations– These are IRS Code Section rules and regulations which must be followed exactly in order to successfully qualify and complete a 1031 Tax Deferred Exchange.
Like Kind Property-All investment property types-land, apartments, industrial, commercial, and retail (except ones personal residence) are like kind property and therefore qualify for a 1031 Tax Deferred Exchange.
NON Like Kind Property-Stock, bonds, foreign property, personal property, inventory, partnership interests, securities, mortgages, Real Estate Investment Trusts, Personal notes, Trust certificates and Beneficial Interests do not qualify for 1031 Tax Deferred Exchanges.
Replacement Property-This is a like kind investment property that the owner exchanges into after selling the relinquished property.
Limited Service Accommodators– These companies refer to Qualified Intermediaries (QI’s) that provide a limited scope of services which are acting as an escrow agent and delivering documention to perfect the 1031 exchange. They usually do not advise the seller in terms of any professional tax, legal, or accounting information.
2-2-2002 IRS Ruling
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1031 Risk Disclosure:
There is no guarantee that any strategy will be successful or achieve investment objectives;
Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
Potential for foreclosure – All financed real estate investments have potential for foreclosure;
Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits