Adjusted Cost Basis: A required computation to determine the capital gains associated with property.  Calculated by taking the original cost of the property and adding the capital improvements and deducting the depreciation deductions. 

Basis: The value assigned to a taxpayer's investment in property.  Utilized in assessing an investor's gain or loss when property is transferred. 

Boot: Fair market value of non-"like-kind" property received in an exchange.  Most commonly, it is money received by the investor in an exchange that is subject to tax at the capital gains rate and possible withholding.  This is a common issue that arises when buying down in value.
          Cash Boot: Money remaining in an exchange subject to tax and potentially subject to withholding.

          Mortgage Boot: Tax liability for debt not replaced in an exchange.

Capital Gain or Loss: The difference between the sales price of property and the Adjusted Cost Basis.  

Capital Gain Tax: Tax levied against an investor at the time of sale by state and federal governments on property held.

Capital Improvements: Expenditures made for the permanent upgrade of property (versus maintenance or upkeep) which allows an investor to add the cost of the improvement to the basis of the property.   
      

Depreciation: A decline in an asset's value due to usage over the property's economic life. 

Depreciation Recapture: The amount of gain attributed to a property upon transfer that corresponds to the depreciation expense previously deducted on an investor's income tax return.    

Direct Deeding: The deeding of either the relinquished or the replacement property directly from the seller or buyer to the investor without requiring the Qualified Intermediary to take title.
 

Exchange Accommodation Titleholder ("EAT"): An independent entity that holds title to the relinquished or replacement property to effectuate a reverse or build-to-suit exchange.  

Exchange Period: The period in which the investor must complete their exchange.  This date is the earlier of the following: the 180^th day of the exchange, as calculated from the day after the closing of the first relinquished property, or the due date of the investor's tax return for the year of the transfer of the relinquished property.  An extension may be filed with the IRS to extend the period beyond the tax-filing date to the 180^th day.
 

Fair Market Value: The price a seller is willing to accept and a buyer is willing to pay. 

Goodwill: A businesses reputation, patronage and other intangible assets that are considered when determining the value of the business. 
 

Identification Period: The 45-day period in which the investor must submit and ensure receipt of a valid identification of replacement property.  The document must be sent to a qualified party before midnight of the 45^th day and results in a failed exchange if not timely sent.  This period begins the day after the first relinquished property closes.

Like-Kind Property: The term "like-kind" investment property refers to how a property is reported to the IRS by the investor for tax purposes.  It does not refer to the type of property held by the investor.  For example, a primary residence is not considered like-kind to an investment property.  However, vacant land that is reported as investment property is considered like-kind to an apartment complex that is likewise reported as an investment property.  

Partial Exchange: An exchange in which tax liability is incurred by the investor (e.g. receipt of cash or mortgage boot).   

Qualified Intermediary: An unrelated party which must be assigned into both the sale and purchase transactions, prepares legal exchange documentation and holds exchange funds.  Financial stability, experience, and personalized attention are essential qualities to be considered in choosing a Qualified Intermediary. 

ERI appreciates the paramount importance of securing investor funds by providing layers of protection including fidelity bond insurance, errors and omissions insurance and a separate bank account for each investor.  For years, ERI has made legal counsel available to discuss individual exchange matters with investors' tax and legal advisors.   

Related Party: Relationships as defined in IRC §267(b).  Such relationships include spouses, children, sibling parents, or grandparents and corporations in which the investor has an ownership interest exceeding 50 percent.

Relinquished Property: Property to be sold in an exchange.

Replacement Property: Property to be acquired in an exchange.

Safe Harbor: Exchange structures that have been approved by the IRS to ensure the deferral of capital gains associated with the sale of property.