The language of 1031 exchanges can be a barrier of its own. Terms like boot, basis, EAT, and constructive receipt recur throughout the process, and not knowing them makes the rules harder to follow than they need to be. This glossary defines the terms you'll meet across an exchange — grouped by theme — so the rules read clearly when you encounter them. Use it as a reference alongside the deeper guides in this series. The most-used terms are also collected in the searchable glossary section below.
Core Concepts: Boot, Basis & Like-Kind
A few terms form the foundation. Boot is taxable cash or unreplaced debt received in an exchange. Basis is your tax investment in the property — original cost plus improvements minus depreciation — which carries over in an exchange. Like-kind means real property of the same nature, which for real estate is broad: almost any U.S. investment real estate is like-kind to almost any other.
Realized gain is your total gain (proceeds minus basis); recognized gain is the portion actually taxed (the boot). Carryover basis is how your old basis follows into the replacement property, preserving the deferred gain. These terms appear throughout every exchange.
The Parties: QI, EAT & Same Taxpayer
Several terms describe who's involved. A qualified intermediary (QI) holds the proceeds so you avoid constructive receipt (access to or control over the funds, which fails the exchange). An exchange accommodation titleholder (EAT) parks property in reverse and improvement exchanges under a qualified exchange accommodation arrangement (QEAA).
The same-taxpayer rule requires the seller and buyer to be the same taxpayer. A disregarded entity (like a single-member LLC) is treated as its owner for this purpose, while a partnership is a separate taxpayer, complicating exchanges where partners want different outcomes.
Property Terms: Relinquished & Replacement
The relinquished property is what you sell to start the exchange; the replacement property is what you acquire to complete it. Fee-simple is whole, direct ownership; fractional ownership is a share via a DST or TIC.
Dealer property is real estate held primarily for sale (flips, inventory), which doesn't qualify. A leasehold of 30+ years is treated as like-kind to a fee interest. Held for investment describes the required purpose — investment or business use, not personal use or sale.
Timeline and Identification Terms
The 45-day identification period and 180-day exchange period are the two deadlines, both counted in calendar days from closing. Identification follows the 3-property rule (up to three of any value), the 200% rule (more than three within 200% of value), or the 95% exception (any number if you acquire 95% of value).
A backup identification — often a fast-closing DST — is identified to protect the deadline. The tax-return-date trap can shorten the 180 days for late-year sales unless you file an extension.
Structures: DST, TIC & UPREIT Terms
A DST (Delaware Statutory Trust) and a TIC (tenants-in-common) are fractional ownership structures usable as replacement property; the DST is the more common modern choice. A 721 exchange / UPREIT contributes property to a REIT operating partnership for OP units, deferring gain — a separate path often used as a DST exit.
Non-recourse debt (secured only by the property) is typical of DSTs, which use it to replace your leverage without you qualifying. A full-cycle sale is when a DST's property is sold at the end of its hold.
Tax Terms: Recapture, NIIT & Step-Up
Depreciation recapture (unrecaptured Section 1250 gain) is the portion of gain from prior depreciation, taxed up to 25%. The net investment income tax (NIIT) is a 3.8% surtax for higher earners. A step-up in basis at death resets basis to fair-market value, eliminating deferred gain for heirs.
Section 121 is the home-sale exclusion (for a primary residence, not a 1031). Section 1033 defers gain from involuntary conversions. These tax terms recur when calculating what an exchange defers and how it fits an overall plan.
Frequently Asked Questions
What does 'boot' mean in a 1031 exchange?
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.
What is basis in a 1031 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.
What is an EAT?
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).
What is the difference between a DST and a TIC?
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.
What does 'like-kind' mean?
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.
What is constructive receipt?
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.
What is carryover basis?
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.
What is a 721 exchange or UPREIT?
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.
What is depreciation recapture?
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.
What is the same-taxpayer rule?
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.
What is a qualified intermediary?
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.
What are the identification rules?
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.
What is non-recourse debt?
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.
What is a step-up in basis?
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.
What is Section 121?
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.
What is a full-cycle DST?
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.
What is realized vs. recognized gain?
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.
What is a sponsor in a DST?
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.
What is a private placement memorandum?
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.
What is an accredited investor?
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.
What is a drop-and-swap?
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.
What is the napkin test?
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.
What is unrecaptured Section 1250 gain?
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.
What is a qualified opportunity fund?
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 tax-free.
What is bridge financing in a reverse exchange?
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.
What is a 1031 exchange company?
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.
What does 'same taxpayer' mean for an LLC?
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.
Where can I find definitions for other 1031 terms?
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.
Glossary
- 1031 Exchange
- A like-kind exchange under IRC Section 1031 deferring capital gains tax on investment real property.
- Boot
- Taxable cash or unreplaced debt (or non-like-kind property) received in an exchange.
- Cash Boot
- Sale equity not reinvested into the replacement property; taxable.
- Mortgage Boot
- Debt relief not offset by new debt or cash; taxable.
- Basis
- Your tax investment in the property — cost plus improvements minus depreciation.
- Adjusted Basis
- Basis after adjustments such as improvements and depreciation.
- Carryover Basis
- The relinquished basis carried into the replacement property in an exchange.
- Realized Gain
- Total gain on the sale — proceeds minus adjusted basis.
- Recognized Gain
- The portion of gain actually taxed — equal to the boot, up to realized gain.
- Like-Kind
- Property of the same nature as real estate; broad for real property.
- Relinquished Property
- The property sold to begin the exchange.
- Replacement Property
- The like-kind property acquired to complete the exchange.
- Qualified Intermediary (QI)
- The required party that holds exchange proceeds and documents the transaction.
- Constructive Receipt
- Access to or control over proceeds, which disqualifies the exchange.
- Exchange Accommodation Titleholder (EAT)
- An entity that parks property in reverse and improvement exchanges.
- Qualified Exchange Accommodation Arrangement (QEAA)
- The agreement under which an EAT holds parked property within the safe harbor.
- Same-Taxpayer Rule
- The seller and buyer in an exchange must be the same taxpayer.
- Disregarded Entity
- An entity (like a single-member LLC) treated as its owner for tax purposes.
- 45-Day Identification Period
- The window from closing to identify replacement property in writing.
- 180-Day Exchange Period
- The window from closing to acquire the replacement property.
- 3-Property Rule
- Identify up to three replacement properties of any value.
- 200% Rule
- Identify more than three properties within 200% of the relinquished value.
- 95% Exception
- Identify any number of properties if you acquire 95% of the identified value.
- Delaware Statutory Trust (DST)
- A trust issuing passive fractional real-property interests usable as replacement property.
- Tenants-in-Common (TIC)
- Direct deeded fractional co-ownership of real property by multiple investors.
- 721 Exchange / UPREIT
- Contributing property to a REIT operating partnership for OP units, deferring gain.
- OP Units
- Operating-partnership units received in a 721 exchange, convertible to REIT shares.
- Non-Recourse Debt
- Debt secured only by the property, without personal liability — typical of DSTs.
- Full-Cycle
- The sale of a DST's property at the end of its hold, returning capital to investors.
- Depreciation Recapture
- Gain from prior depreciation, taxed up to 25% (unrecaptured Section 1250 gain).
- Net Investment Income Tax (NIIT)
- A 3.8% federal surtax on investment income for higher earners.
- Step-Up in Basis
- The reset of basis to fair-market value at death, eliminating deferred gain for heirs.
- Section 121
- The home-sale exclusion for a primary residence (not a 1031).
- Section 1033
- Deferral of gain from involuntary conversions (condemnation, casualty).
- Dealer Property
- Real estate held primarily for sale; not 1031-eligible.
- Held for Investment
- The required purpose for 1031 — investment or business use, not personal or sale.
- Reverse Exchange
- Acquiring the replacement before selling, via a parking structure.
- Improvement Exchange
- Using exchange funds to build or improve the replacement within 180 days.
- Form 8824
- The IRS form reporting a like-kind exchange and carryover basis.
- Tax-Return-Date Trap
- The risk that a late-year sale's return due date shortens the 180-day window.
- Cash Boot
- Sale equity not reinvested into the replacement property; taxable.
- Realized vs. Recognized Gain
- Realized gain is total gain on the sale; recognized gain is the portion taxed (the boot).
- Equal-or-Greater-Value Rule
- To fully defer, the replacement must equal or exceed the relinquished value, with debt replaced.
- Identification Notice
- The written, signed list of replacement properties delivered to the QI within 45 days.
- Backup Identification
- A fast-closing option (often a DST) identified to protect the deadline.
- Loan-to-Value (LTV)
- Debt divided by property value; the lens for matching replacement leverage.
- Sponsor
- The firm that creates and manages a DST or TIC program.
- Sponsor Load
- The total fees and costs in a fractional program, as a percentage of the raise.
- Private Placement Memorandum (PPM)
- The disclosure document under which a DST or other private placement is offered.
- Accredited Investor
- An investor meeting SEC income or net-worth thresholds, eligible for private placements like DSTs.
- Rev. Rul. 2004-86
- The IRS ruling treating a DST interest as direct ownership of real property for 1031 purposes.
- Rev. Proc. 2000-37
- The IRS safe harbor governing reverse and improvement (parking) exchanges.
- Rev. Proc. 2002-22
- IRS guidance on when a co-ownership is treated as a TIC rather than a partnership.
- Drop-and-Swap
- Distributing TIC interests to partners before a sale so they can exchange separately.
- Swap-and-Drop
- Distributing interests to partners after an exchange; carries timing risk.
- Related Party
- Family or controlled entities, subject to the two-year holding rule in exchanges.
- Mortgage Boot
- Debt relief not offset by new debt or cash; taxable.
- Net-Lease (NNN)
- A property leased to a tenant who pays taxes, insurance, and maintenance, often long-term.
- Credit Tenant
- A tenant with strong (often investment-grade) creditworthiness, supporting reliable rent.
- Single-Tenant Concentration
- The risk of depending on one tenant for all of a property's income.
- Cap Rate
- Net operating income divided by value; a core real estate pricing measure.
- Depreciation
- A deduction recovering a building's cost over 27.5 (residential) or 39 (commercial) years.
- Unrecaptured Section 1250 Gain
- The real-property depreciation-recapture portion of gain, taxed up to 25%.
- Cost Segregation
- A study accelerating depreciation, increasing early deductions and later recapture.
- Installment Sale
- A sale with payments over time that can spread gain recognition; an alternative to a 1031.
- Qualified Opportunity Fund
- A fund that can defer and reduce capital gains reinvested into opportunity zones.
- Bridge Financing
- Short-term financing used to fund an up-front purchase in a reverse exchange.
- Build-to-Suit Exchange
- An improvement exchange used to construct a property to the investor's specifications.
- Forward (Delayed) Exchange
- The standard structure: sell the relinquished property first, then acquire the replacement within the deadlines.
- Simultaneous Exchange
- An exchange where both legs close on the same day; the original form, now rare.
- Improvement / Construction Exchange
- Using exchange funds to build or renovate the replacement within 180 days.
- Reverse Exchange
- Acquiring the replacement before selling the relinquished property, via a parking structure.
- Parked Property
- The property held by an EAT until a reverse or improvement exchange can complete.
- Master Lease
- A lease structure sometimes used in fractional or DST arrangements to handle operations.
- Net Operating Income (NOI)
- A property's income after operating expenses; the numerator in the cap rate.
- Rent Escalation
- Scheduled rent increases in a lease that grow income over time.
- Absolute-Net Lease
- A lease where the tenant pays virtually all costs, including structure and roof.
- Going-In Yield
- The initial distribution rate or cap rate of an investment at acquisition.
- Suitability Determination
- The assessment that a private placement (like a DST) is appropriate for an investor.
- Regulation D
- The SEC framework under which private placements like DSTs are offered to accredited investors.
- Broker-Dealer
- A firm registered to offer securities such as DSTs; Baker 1031's is Aurora Securities, member FINRA/SIPC.
- FINRA / SIPC
- The self-regulatory organization and investor-protection corporation overseeing securities firms.
- Percentage Depletion
- A deduction (commonly 15% for oil and gas royalty owners) sheltering part of royalty income.
- Mineral / Royalty Interest
- Oil and gas interests that, when perpetual, are real property eligible for 1031.
- PV-10
- The present value of future net revenues from proved reserves, discounted at 10% — a reserve valuation measure.
- Involuntary Conversion
- Loss of property by condemnation, casualty, or theft, eligible for 1033 deferral.
- Condemnation / Eminent Domain
- A government taking of property for public use, with compensation; a 1033 trigger.
- Net Sale Price
- Sale price minus selling costs; the basis for the equal-or-greater-value target.
- Selling Costs
- Commissions and closing costs that reduce net proceeds and gain.
- Reinvestable Equity
- Proceeds available to reinvest after debt payoff and selling costs.
- Effective Tax Rate
- Total tax divided by total gain across all applicable layers.
- Constructive Improvements
- Improvements completed and paid for within 180 days that count toward replacement value.
- Three-Property Rule
- An identification method allowing up to three replacement properties of any value.
- 200% Rule
- An identification method allowing any number of properties whose combined value is up to 200% of the relinquished property's value.
- 95% Rule
- An identification method allowing any number of properties of any value if you acquire at least 95% of the identified value.
- Direct Deeding
- Modern practice where title passes directly between the true buyer and seller, with the QI holding only the exchange funds.
- Exchange Agreement
- The contract between the taxpayer and the qualified intermediary that documents and governs the exchange.
- Assignment of Contract
- The QI's assignment into the purchase and sale agreements, a required step that makes the exchange work mechanically.
- Qualified Escrow Account
- A restricted account where exchange funds are held so the taxpayer has no access, preventing constructive receipt.
- Like-Kind
- The standard requiring exchanged properties to be of the same nature or character; nearly all U.S. real property held for investment is like-kind to other such real property.
- Held for Investment
- The required purpose for both relinquished and replacement property; rules out personal-use and dealer property.
- Dealer Property
- Real estate held primarily for sale (inventory), which is ineligible for 1031 treatment.
- Vacation-Home Safe Harbor
- Rev. Proc. 2008-16 conditions under which a vacation property's rental use can qualify it for exchange.
- Clawback
- A state rule (e.g., California) taxing previously deferred gain when an out-of-state replacement is later sold without another exchange.
- Mortgage Boot
- Taxable gain created when replacement debt is less than relinquished debt and the gap isn't offset with cash.
- Cash Boot
- Taxable proceeds the exchanger receives rather than reinvesting.
- Fair Market Value
- The price a willing buyer and seller would agree to; the basis for the equal-or-greater-value test.
- Replacement Period
- The 180-day window (or tax-return due date, if earlier) to close on the replacement property.
- Identification Period
- The first 45 days after closing, within which replacement properties must be formally identified.
- Tax-Deferred vs. Tax-Free
- A 1031 defers gain (it carries forward in basis); only a step-up at death or the QOZ 10-year rule makes appreciation truly tax-free.
- Form 8824
- The IRS form on which a like-kind exchange is reported for the year the relinquished property is sold.
- Errors-and-Omissions Insurance
- Coverage a reputable qualified intermediary carries to protect against mistakes in handling an exchange.
- Fidelity Bond
- A bond protecting exchange funds against misappropriation by the qualified intermediary.
- Carryover Basis
- The adjusted basis of the relinquished property that transfers to the replacement, preserving the deferred gain.
Sources & References
- IRS. Like-Kind Exchanges — terminology
- IPX1031. 1031 exchange glossary
- Baker 1031 Investments. Learning Center
- JTC Group. 1031 and Real Estate: Answers to Common Questions
Disclosures
This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.
Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.
