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.
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. Content subject to registered-principal review.