Definitions
1031 & DST Terminology
1031 exchanges, Delaware Statutory Trusts, and private real estate investments come with specialized terminology that can make an already complex decision more difficult to understand.
This glossary provides straightforward definitions of common terms you may encounter while researching a 1031 exchange, evaluating replacement property, reviewing a DST investment, or considering other real estate investment strategies.
Expert Advisory
Navigate the Complexity
Have Questions About 1031 Exchange & DST?
Get professional support for your next real estate transaction.
01
1031 Exchange
A 1031 exchange, also known as a like-kind exchange, is a transaction structured under Section 1031 of the Internal Revenue Code that may allow an investor to defer recognition of gain when qualifying real property held for business or investment is exchanged for other qualifying real property.
A 1031 exchange defers applicable gain when the requirements are satisfied. It does not automatically eliminate the tax. (irs.gov)
A 1031 exchange defers applicable gain when the requirements are satisfied. It does not automatically eliminate the tax. (irs.gov)
02
3-Property Rule
One of the identification methods available in a deferred 1031 exchange.
Under the 3-Property Rule, an investor may generally identify up to three potential replacement properties regardless of their fair market value, provided the identification requirements are otherwise satisfied.
Under the 3-Property Rule, an investor may generally identify up to three potential replacement properties regardless of their fair market value, provided the identification requirements are otherwise satisfied.
03
45-Day Identification Period
The period during which replacement property generally must be identified in a deferred 1031 exchange.
The identification deadline is 45 days after the transfer of the relinquished property. The identification generally must satisfy specific written identification requirements. (irs.gov)
The identification deadline is 45 days after the transfer of the relinquished property. The identification generally must satisfy specific written identification requirements. (irs.gov)
04
180-Day Exchange Period
The period during which the investor generally must receive the replacement property.
The deadline is generally the earlier of 180 days after the relinquished property is transferred or the applicable due date, including extensions, of the federal income tax return for the year of the transfer. (irs.gov)
The 45-day and 180-day periods run at the same time.
The deadline is generally the earlier of 180 days after the relinquished property is transferred or the applicable due date, including extensions, of the federal income tax return for the year of the transfer. (irs.gov)
The 45-day and 180-day periods run at the same time.
05
200% Rule
Another method for identifying multiple replacement properties in a deferred 1031 exchange.
The 200% Rule generally permits an investor to identify more than three properties when the aggregate fair market value of all identified properties does not exceed 200% of the aggregate fair market value of the relinquished property or properties.
The 200% Rule generally permits an investor to identify more than three properties when the aggregate fair market value of all identified properties does not exceed 200% of the aggregate fair market value of the relinquished property or properties.
06
95% Rule
A less commonly used identification rule that may apply when an investor identifies more properties than permitted under the 3-Property or 200% rules.
Generally, the rule can preserve the identification if the investor receives identified replacement property representing at least 95% of the aggregate fair market value of all properties identified.
Generally, the rule can preserve the identification if the investor receives identified replacement property representing at least 95% of the aggregate fair market value of all properties identified.
07
Accredited Investor
An accredited investor is an individual or entity that meets one or more criteria established under federal securities regulations.
Individuals may qualify through specified income or net worth thresholds, certain securities licenses, or other qualifying circumstances. Accredited investor status can determine eligibility to participate in certain private securities offerings. (sec.gov)
Accredited investor status does not mean that a particular investment is appropriate or low-risk.
Individuals may qualify through specified income or net worth thresholds, certain securities licenses, or other qualifying circumstances. Accredited investor status can determine eligibility to participate in certain private securities offerings. (sec.gov)
Accredited investor status does not mean that a particular investment is appropriate or low-risk.
08
Adjusted Basis
Adjusted basis is generally the original basis of property, adjusted over time for items such as improvements, depreciation, and certain other events.
Basis is important when calculating gain or loss on the disposition of an investment property and when determining the basis carried into replacement property in a qualifying 1031 exchange. (irs.gov)
Basis is important when calculating gain or loss on the disposition of an investment property and when determining the basis carried into replacement property in a qualifying 1031 exchange. (irs.gov)
09
Beneficial Interest
A beneficial interest represents an investor's economic interest in a trust or similar structure.
In a Delaware Statutory Trust real estate investment, investors generally acquire beneficial interests in the trust rather than taking individual title to the entire underlying property.
In a Delaware Statutory Trust real estate investment, investors generally acquire beneficial interests in the trust rather than taking individual title to the entire underlying property.
10
Boot
Boot is an informal term commonly used in 1031 exchange planning to describe money or other non-like-kind property received as part of an exchange.
Receiving boot does not necessarily invalidate the entire exchange, but it can result in recognized gain depending on the transaction and applicable tax rules.
Receiving boot does not necessarily invalidate the entire exchange, but it can result in recognized gain depending on the transaction and applicable tax rules.
11
Capital Gain
A capital gain generally occurs when a capital asset is sold or disposed of for more than its adjusted basis.
The tax treatment of a gain depends on factors including the type of asset, how long it was held, and the taxpayer's individual circumstances.
A properly structured 1031 exchange may allow recognition of certain gain from qualifying real property to be deferred.
The tax treatment of a gain depends on factors including the type of asset, how long it was held, and the taxpayer's individual circumstances.
A properly structured 1031 exchange may allow recognition of certain gain from qualifying real property to be deferred.
12
Constructive Receipt
Constructive receipt refers to circumstances in which a taxpayer may be treated as having received funds even if the money was not physically placed in the taxpayer's hands.
This concept is particularly important in deferred 1031 exchanges. An investor's actual or constructive receipt of sale proceeds can prevent the intended exchange treatment.
Qualified Intermediary arrangements are commonly used to help satisfy applicable safe-harbor requirements.
This concept is particularly important in deferred 1031 exchanges. An investor's actual or constructive receipt of sale proceeds can prevent the intended exchange treatment.
Qualified Intermediary arrangements are commonly used to help satisfy applicable safe-harbor requirements.
13
Delaware Statutory Trust
A Delaware Statutory Trust, or DST, is a legal trust structure established under Delaware law that can be used to own real estate and other assets.
In a real estate DST, investors generally acquire beneficial interests in the trust while the trust owns the underlying real property.
IRS Revenue Ruling 2004-86 addressed a particular DST structure and concluded that beneficial interests meeting the circumstances described in the ruling could be treated as interests in the underlying real property for purposes of Section 1031.
In a real estate DST, investors generally acquire beneficial interests in the trust while the trust owns the underlying real property.
IRS Revenue Ruling 2004-86 addressed a particular DST structure and concluded that beneficial interests meeting the circumstances described in the ruling could be treated as interests in the underlying real property for purposes of Section 1031.
14
Deferred 1031 Exchange
A deferred exchange occurs when the relinquished property is transferred before the investor receives the replacement property.
Because the transactions do not occur simultaneously, deferred exchanges are subject to identification, timing, and other requirements, including the 45-day and 180-day deadlines.
Because the transactions do not occur simultaneously, deferred exchanges are subject to identification, timing, and other requirements, including the 45-day and 180-day deadlines.
15
Depreciation
Depreciation is a tax deduction that generally allows the cost or other basis of qualifying property to be recovered over time.
Depreciation deductions can affect the adjusted basis of an investment property and therefore influence the tax consequences when the property is eventually sold or exchanged.
Depreciation deductions can affect the adjusted basis of an investment property and therefore influence the tax consequences when the property is eventually sold or exchanged.
16
Depreciation Recapture
Depreciation recapture generally refers to tax rules that can cause some gain associated with prior depreciation deductions to receive different tax treatment when depreciable property is disposed of.
The interaction between depreciation, Section 1031, and eventual disposition can be complex. Investors should discuss their individual tax consequences with a qualified tax professional.
The interaction between depreciation, Section 1031, and eventual disposition can be complex. Investors should discuss their individual tax consequences with a qualified tax professional.
17
Distribution
A distribution is a payment made from an investment to its investors.
DST offerings may make periodic distributions based on available cash generated by the underlying real estate and the terms of the offering.
Distributions are not guaranteed and can be reduced or suspended.
DST offerings may make periodic distributions based on available cash generated by the underlying real estate and the terms of the offering.
Distributions are not guaranteed and can be reduced or suspended.
18
DST Sponsor
A DST sponsor is generally the company responsible for structuring and bringing a DST investment offering to market.
Depending on the investment, a sponsor's responsibilities may include identifying or acquiring the underlying property, arranging financing, establishing the investment structure, coordinating management, and eventually implementing a disposition strategy.
Sponsor experience and the terms of the specific offering are important parts of evaluating a DST investment.
Depending on the investment, a sponsor's responsibilities may include identifying or acquiring the underlying property, arranging financing, establishing the investment structure, coordinating management, and eventually implementing a disposition strategy.
Sponsor experience and the terms of the specific offering are important parts of evaluating a DST investment.
19
Exchange Period
The exchange period is the period during which replacement property must generally be received in a deferred 1031 exchange.
The federal exchange period generally ends on the earlier of the 180th day after the relinquished property transfer or the applicable federal income tax return deadline, including extensions.
The federal exchange period generally ends on the earlier of the 180th day after the relinquished property transfer or the applicable federal income tax return deadline, including extensions.
20
Identification Period
The identification period is the 45-day period during which an investor generally must identify potential replacement property in a deferred 1031 exchange.
It begins on the date the relinquished property is transferred.
It begins on the date the relinquished property is transferred.
21
Investment Property
Investment property generally refers to property held for investment rather than primarily for personal use or resale.
Section 1031 applies to qualifying real property held for productive use in a trade or business or for investment. Property held primarily for sale does not qualify.
Section 1031 applies to qualifying real property held for productive use in a trade or business or for investment. Property held primarily for sale does not qualify.
22
Leverage
Leverage refers to the use of borrowed money or debt to finance an investment.
Direct real estate and DST investments may use leverage. Debt can affect potential returns, cash flow, risk, and the overall economics of an investment.
Direct real estate and DST investments may use leverage. Debt can affect potential returns, cash flow, risk, and the overall economics of an investment.
23
Like-Kind Property
Like-kind property refers to property that satisfies the nature or character requirements of Section 1031.
For qualifying real estate, like-kind treatment is broader than simply exchanging one identical property type for another. Qualifying investment real estate may generally be exchanged for different types of qualifying real property.
U.S. real property is not considered like-kind to real property located outside the United States.
For qualifying real estate, like-kind treatment is broader than simply exchanging one identical property type for another. Qualifying investment real estate may generally be exchanged for different types of qualifying real property.
U.S. real property is not considered like-kind to real property located outside the United States.
24
Private Placement
A private placement is an offering of securities that relies on an exemption from SEC registration rather than being offered through a registered public offering.
Many private real estate investments, including certain DST offerings, are structured as private placements.
Eligibility requirements, disclosure, liquidity, and other characteristics can differ materially from publicly traded investments. Regulation D is one framework commonly used for exempt private offerings.
Many private real estate investments, including certain DST offerings, are structured as private placements.
Eligibility requirements, disclosure, liquidity, and other characteristics can differ materially from publicly traded investments. Regulation D is one framework commonly used for exempt private offerings.
25
Qualified Intermediary
A Qualified Intermediary, commonly called a QI, is an independent party commonly used to facilitate a deferred 1031 exchange.
Under a qualifying arrangement, the QI acquires and transfers the relinquished property and acquires and transfers the replacement property as required by the exchange agreement, while the investor's rights to access the exchange funds are restricted.
Using a QI is a commonly used safe-harbor structure designed to avoid actual or constructive receipt of the proceeds. Customized 1031 does not serve as the Qualified Intermediary.
Under a qualifying arrangement, the QI acquires and transfers the relinquished property and acquires and transfers the replacement property as required by the exchange agreement, while the investor's rights to access the exchange funds are restricted.
Using a QI is a commonly used safe-harbor structure designed to avoid actual or constructive receipt of the proceeds. Customized 1031 does not serve as the Qualified Intermediary.
26
Qualified Opportunity Fund
A Qualified Opportunity Fund, or QOF, is an investment vehicle organized as a corporation or partnership for the purpose of investing in Qualified Opportunity Zone property.
A QOF generally must maintain at least 90% of its assets in qualifying Opportunity Zone property.
A QOF generally must maintain at least 90% of its assets in qualifying Opportunity Zone property.
27
Qualified Opportunity Zone
A Qualified Opportunity Zone, or QOZ, is a designated economically distressed community eligible for investment under the federal Opportunity Zone program.
Investors may access qualifying Opportunity Zone investments through Qualified Opportunity Funds.
Investors may access qualifying Opportunity Zone investments through Qualified Opportunity Funds.
28
Realized Gain
Realized gain generally refers to the economic gain calculated when property is sold or otherwise disposed of.
Realized gain and taxable or recognized gain are not always the same. In a qualifying 1031 exchange, some or all of a realized gain may potentially be deferred rather than currently recognized.
Realized gain and taxable or recognized gain are not always the same. In a qualifying 1031 exchange, some or all of a realized gain may potentially be deferred rather than currently recognized.
29
Recognized Gain
Recognized gain is the portion of a realized gain that is included for tax purposes.
A properly structured 1031 exchange can potentially defer recognition of gain that otherwise might be recognized at the time qualifying real estate is sold.
A properly structured 1031 exchange can potentially defer recognition of gain that otherwise might be recognized at the time qualifying real estate is sold.
30
Relinquished Property
The relinquished property is the property an investor transfers or gives up as part of a 1031 exchange.
It is sometimes informally referred to as the "downleg" property.
The transfer of the relinquished property generally starts the 45-day identification and 180-day exchange periods in a deferred exchange.
It is sometimes informally referred to as the "downleg" property.
The transfer of the relinquished property generally starts the 45-day identification and 180-day exchange periods in a deferred exchange.
31
Replacement Property
Replacement property is the qualifying real property an investor receives as part of a 1031 exchange.
Investors may potentially consider different types of qualifying replacement real estate rather than simply duplicating the property they sold.
Replacement property planning can include directly owned real estate and, for eligible investors and qualifying structures, certain DST interests.
Investors may potentially consider different types of qualifying replacement real estate rather than simply duplicating the property they sold.
Replacement property planning can include directly owned real estate and, for eligible investors and qualifying structures, certain DST interests.
32
Replacement Property Identification
Replacement property identification is the process of formally identifying potential replacement property during the applicable 45-day identification period.
The identification generally must be in writing, signed by the taxpayer, clearly describe the property, and be delivered to an appropriate party as required by the regulations.
The identification generally must be in writing, signed by the taxpayer, clearly describe the property, and be delivered to an appropriate party as required by the regulations.
33
Section 1031
Section 1031 refers to the section of the Internal Revenue Code governing like-kind exchanges.
Under current federal law, the nonrecognition rules generally apply to qualifying real property held for investment or productive use in a trade or business.
Under current federal law, the nonrecognition rules generally apply to qualifying real property held for investment or productive use in a trade or business.
34
Sponsor
A sponsor is generally the company responsible for organizing, structuring, and managing a private investment offering.
In real estate investments, the sponsor may identify properties, structure the offering, arrange financing, oversee operations, and execute the investment strategy.
The sponsor's experience, financial interests, fees, conflicts, and track record can be important considerations when evaluating a private real estate investment.
In real estate investments, the sponsor may identify properties, structure the offering, arrange financing, oversee operations, and execute the investment strategy.
The sponsor's experience, financial interests, fees, conflicts, and track record can be important considerations when evaluating a private real estate investment.
35
Tax Deferral
Tax deferral means postponing recognition of a tax obligation rather than necessarily eliminating it.
A qualifying 1031 exchange can allow recognition of certain gain to be deferred by carrying the investment into qualifying replacement property.
The deferred gain may become relevant in a later taxable disposition, depending on the investor's circumstances and applicable law.
A qualifying 1031 exchange can allow recognition of certain gain to be deferred by carrying the investment into qualifying replacement property.
The deferred gain may become relevant in a later taxable disposition, depending on the investor's circumstances and applicable law.
36
Tenancy-in-Common
Tenancy-in-common, commonly abbreviated TIC, is a form of real property co-ownership in which multiple owners hold undivided interests in the same property.
A TIC ownership structure differs from a Delaware Statutory Trust. The legal rights, management structure, financing, investor control, and potential Section 1031 treatment should be evaluated based on the specific arrangement.
A TIC ownership structure differs from a Delaware Statutory Trust. The legal rights, management structure, financing, investor control, and potential Section 1031 treatment should be evaluated based on the specific arrangement.
Understand the Terms, Then Evaluate the Strategy
Knowing the terminology can make it easier to understand a 1031 exchange or evaluate a private real estate investment, but definitions alone do not determine whether a strategy is appropriate.
If you are considering a 1031 exchange, replacement property, Delaware Statutory Trust, or related real estate investment strategy, Customized 1031 can help you understand the available options and the considerations involved.