1031 Exchange Glossary: Key Terms Every Investor Should Know
Reading about 1031 exchanges for the first time can feel like learning a second vocabulary. Between IRS terminology, industry shorthand, and the specific language used by Qualified Intermediaries, it’s easy to get lost in the jargon. This 1031 exchange terms glossary breaks down more than 20 of the most important words and phrases you’ll encounter, in plain English, with links to deeper articles where we’ve covered a topic in more detail.
If any of these terms apply to a transaction you’re planning, it helps to talk it through with someone who handles exchanges every day. Contact Aspen Exchange before your sale closes to make sure your terminology and your strategy line up.
Core Exchange Terms
Qualified Intermediary (QI)An independent third party who holds the proceeds from your relinquished property sale and uses them to acquire your replacement property, so that you never take direct or constructive receipt of the funds. Using a Qualified Intermediary is a legal requirement for a valid delayed exchange. See our guide to how to choose a Qualified Intermediary.Relinquished PropertyThe property you sell, or give up, as the starting point of a 1031 exchange. Sometimes called the “downleg” property in industry shorthand. See our overview of what is a 1031 exchange for how this fits into the overall process.Replacement PropertyThe property you acquire to complete your exchange, sometimes called the “upleg” property. It must be identified within the identification period and acquired within the exchange period. See our guide to finding replacement property before your 45-day deadline.Like-KindThe requirement that both the relinquished and replacement properties be real property held for investment or business use. Since 2017, like-kind no longer includes personal property such as equipment or vehicles, only real estate qualifies. Despite the name, “like-kind” is interpreted broadly for real estate, so very different property types can generally qualify for each other.BootAny value received in an exchange that is not like-kind real property, such as cash left over, debt relief not offset by new debt, or non-qualifying property. Boot is generally taxable to the extent of the gain realized, even if the rest of the exchange is properly structured. See our full explanation of 1031 exchange boot.Identification PeriodThe 45-day window, starting on the day the relinquished property closes, during which the taxpayer must formally identify potential replacement properties in writing to the Qualified Intermediary. This period runs concurrently with the exchange period and includes weekends and holidays. See our guide to the 1031 exchange 45-day rule.Exchange PeriodThe 180-day window, also starting on the relinquished property’s closing date, within which the taxpayer must close on the replacement property. It runs concurrently with, not after, the 45-day identification period. See our step-by-step guide to how to do a 1031 exchange.Qualified UseThe requirement that both the relinquished and replacement properties be held for investment purposes or used in a trade or business, rather than as a primary residence or held primarily for resale (dealer property). See our guide to 1031 exchange rules for how qualified use is evaluated.Disqualified PersonSomeone who cannot serve as your Qualified Intermediary because of a close relationship to you, including your agent, broker, attorney, accountant, employee, or certain family members, generally within the two years before your exchange, with narrow exceptions. Using a disqualified person as your intermediary can invalidate the exchange.Constructive ReceiptA tax law concept referring to a taxpayer having control over funds even if they haven’t physically taken possession of them. Avoiding constructive receipt of exchange proceeds, by routing them through a Qualified Intermediary under a proper exchange agreement, is essential to preserving tax deferral.
Structures and Property Arrangements
Delaware Statutory Trust (DST)A legal entity that holds title to real property on behalf of multiple investors, allowing each investor to own a fractional, passive interest that can qualify as replacement property in a 1031 exchange. See our full guide to DST 1031 exchanges and our comparison of DST versus direct ownership.Tenants in Common (TIC)An ownership structure where multiple investors each hold an undivided, direct fractional interest in a single property, as opposed to interests in a trust. TIC interests can also qualify as replacement property in an exchange. See our detailed guide to TIC 1031 exchange structures.Reverse ExchangeAn exchange structure where the replacement property is acquired before the relinquished property is sold, the opposite order of a typical delayed exchange. Reverse exchanges require an Exchange Accommodation Titleholder to temporarily hold title to one of the properties. See our guide to reverse 1031 exchanges explained.Improvement ExchangeAlso called a construction or build-to-suit exchange, this structure allows exchange funds to be used to make improvements to the replacement property before the exchange period ends, with the improved value counting toward the exchange requirement. See our guide to construction and build-to-suit 1031 exchanges.Parking Arrangement / Exchange Accommodation Titleholder (EAT)A structure used in reverse and improvement exchanges where a separate legal entity, the Exchange Accommodation Titleholder, temporarily holds, or “parks,” title to a property so the exchange can proceed within IRS safe harbor guidelines. See our explanation of 1031 exchange parking arrangements.
Identification Rules
3-Property RuleAn identification method allowing a taxpayer to identify up to three potential replacement properties, regardless of their combined value, within the 45-day identification period. See our full breakdown of 1031 exchange identification rules.200% RuleAn identification method allowing a taxpayer to identify more than three properties, as long as their combined fair market value does not exceed 200% of the value of the relinquished property.95% RuleAn identification method allowing a taxpayer to identify any number of properties of any combined value, provided the taxpayer ultimately acquires at least 95% of the total value identified. This rule carries more risk since it requires closing on nearly everything identified.
Compliance and Documentation
Related PartyA person or entity with a close family or ownership relationship to the taxpayer, such as a sibling, parent, child, or an entity in which the taxpayer holds a significant ownership interest. Exchanges between related parties are permitted but carry additional restrictions and holding period requirements. See our guide to related party 1031 exchange rules.Dealer PropertyProperty held primarily for sale to customers in the ordinary course of business, such as a home builder’s inventory of new houses, rather than for investment. Dealer property generally does not qualify for 1031 exchange treatment, which is why intent and holding period matter when evaluating a property’s eligibility.Form 8824The IRS tax form used to report a like-kind exchange for the tax year in which it occurred, documenting the properties involved, dates, values, and any recognized gain or boot. Your CPA typically prepares this form as part of your tax return filing.
Frequently Asked Questions
What’s the difference between the identification period and the exchange period?
The identification period is the first 45 days after your relinquished property closes, during which you must formally name potential replacement properties. The exchange period is the full 180 days, running concurrently, within which you must close on your replacement property.
Is boot always taxable?
Boot is generally taxable to the extent of the gain realized in the exchange. If your exchange has little or no gain, boot may have limited or no tax impact, but this depends on your specific numbers and should be reviewed with your CPA.
Can my real estate agent act as my Qualified Intermediary?
Generally no. Your real estate agent, broker, attorney, accountant, or employee within the prior two years is typically considered a disqualified person and cannot serve as your Qualified Intermediary, with narrow exceptions.
What’s the difference between a DST and a TIC?
A DST is a trust structure that holds title on behalf of investors, offering a more passive, standardized ownership interest. A TIC gives investors a direct, undivided fractional ownership interest in the property itself. Both can qualify as 1031 replacement property but have different governance and flexibility tradeoffs.
Why would someone use a reverse exchange instead of a regular delayed exchange?
A reverse exchange is used when an investor needs or wants to acquire the replacement property before selling the relinquished property, often because a desirable property becomes available on a timeline that doesn’t match the sale of the existing property.
Does dealer property ever qualify for a 1031 exchange?
Generally not. Property held primarily for resale, rather than for investment or business use, is excluded from 1031 treatment. Whether a specific property counts as dealer property depends on facts and circumstances, including holding period and intent, and should be evaluated with your tax advisor.
Plan Your Exchange Before You Sell
Knowing the vocabulary is a good start, but applying it correctly to your specific transaction is where the real value comes in. Bring your questions to a team that handles this terminology every day. Get started with Aspen Exchange or contact our exchange team before your closing date.
This article is educational information, not tax, legal, or investment advice. Consult your own qualified advisors regarding your transaction.
