Our dictionary will help define 1031 exchange tax, NNN, capital gains and real estate terms.
Accommodator (also referred to as Intermediary)
The company or individual(usually title company or attorney) who acts as a "middle man" for 1031 investors. Gains are deferred in a 1031 exchange by the accommodator taking posession of sale proceeds at closing and dispersing proceeds upon the closing of a suitable replacement property.
Adjusted Cost Basis
The cost of a property combined with the cost of capital improvements, less annual depreciation and capital losses.
Amortization
The gradual elimination of a liability, such as a mortgage, in regular payments over a specified period of time. Such payments must be sufficient to cover both principal and interest.
Amortization Term
The period of time over which the loan will be amortized, usually expressed in months.
Assign
To transfer ownership of a property or right to another party by signing a document.
Assignment
The receipt of an exercise notice by an option writer that requires him/her to sell the security in the case of a call option, or to buy the security in the case of a put option, at the specified strike price.
Balance Sheet
A quantitative summary of a company’s financial condition at a specific point in time, including assets, liabilities and net worth.
Basis Point
One hundredth of a percentage point (0.01 percentage points). Used to measure changes in or differences between yields or interest rates.
Boot
Any un-like property received in an exchange, such as cash or mortgage relief in excess of the new mortgage
Capital Gain
The amount by which an asset’s selling price exceeds its initial purchase price. A realized capital gain is an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn’t been sold yet but would result in a profit if sold. Capital gain is often used to mean realized capital gain. Opposite of Capital loss.
CAP Rate
A ratio showing the return on investment if the property was unleveraged. The CAP rate is derived by dividing Net Operating Income (NOI) by the price.
Cost of Capital
The opportunity cost of an investment, i.e. the rate of return that a company would otherwise be able to earn at the same risk level as the investment that has been selected.
Cost of Living Adjustment (COLA)
An annual adjustment in wages to offset a change (usually a loss) in purchasing power, as measured by the Consumer Price Index.
Debt Service
The series of payments of interest and principal required on a debt over a given period of time.
Depreciation
The allocation of the cost of an asset over a period of time for accounting and tax purposes. A decline in the value of a property due to general wear and tear or obsolescence; opposite of appreciation.
Due Diligence
The process of investigation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts.
Escrow
Documents, real estate, money, or securities deposited with a neutral third party (the escrow agent) to be delivered upon fulfillment of certain conditions, as established in a written agreement. An account held by the lender into which a homeowner pays money for taxes and insurance.
Exchanger
The taxpayer who owns property which has appreciated in value, and who wants to defer any capital gains taxes by exchanging for similar like-kind property.
Exchange Period
The exchanger has 180 calendar days from the date of the close of escrow of the relinquished property in which to complete the entire exchange.
Identification Period
The exchanger must submit within 45 days of the closing of the relinquished property up to three potential replacement properties. The identification of the properties must specifically state the addresses or legal descriptions with any improvements detailed as clearly as possible.
Improvement (Construction) Exchange
When the replacement property includes buildings to be built, or other improvements to be completed as part of the exchange. This usually occurs to balance the values of the acquired property with the relinquished property. To make the exchange work, someone other than the seller (usually the intermediary) would need to take title to the replacement property, make the improvements identified within the 45-day identification and convey title to the seller within the 180-day exchange period.
Intermediary
A third party who facilitates a deal between two other parties.
IRC 1031
The Section of the Internal Revenue Code which sets forth the specific terms and conditions under which taxpayers may exchange certain types of property without recognition of capital gains taxes.
Landlord/Lessor
The opportunity cost of an investment, i.e. the rate of return that a company would otherwise be able to earn at the same risk level as the investment that has been selected.
Leasehold
The right to hold or use property for a fixed period of time at a given price, without transfer of ownership, on the basis of a lease contract. A leasehold is a fixed asset.
Lessee/Tenant
A person who leases a property from its owner.
Letter of Intent (LOI)
A letter from one company to another acknowledging a willingness and ability to do business.
Like-Kind Exchange
An exchange of similar business or investment assets, on which gains may be tax-deferred.
Loan-to-Value (LTV)
The amount borrowed divided by the appraised value of the collateral, expressed as a percentage.
Net Lease
A property lease in which the lessee agrees to pay all expenses that are normally associated with ownership, such as utilities, repairs, insurance and taxes.
Relinquished Property
The property the exchanger is selling as the first step in the process.
Reverse Exchange
When the exchanger acquires replacement property prior to closing on the relinquished property. Receives the same benefits as the Deferred Exchange. To make the exchange work, the intermediary must take title to one of the properties until the seller is ready to convey the relinquished property to a buyer.
Taxable Event
Transaction or occurrence that has tax consequences..
Tax Deferral
Paying taxes in the future for income earned in the current year, such as through an IRA, 401(k), SEP IRA or Keogh Plan.
Tenancy-In-Common (TIC)
A type of joint tenancy of property without right of survivorship; each tenant’s portion of ownership is distributable under will.
Triple Net Lease - NNN
A lease in which the lessee pays rent to the lessor, as well as all taxes, insurance, and maintenance expenses that arise from the use of the property.