Glossary of Terms
1
1031 Exchange
A tax-deferral strategy under Section 1031 of the Internal Revenue Code that allows investors to sell investment property and reinvest the proceeds into like-kind replacement property while deferring capital gains taxes. Also known as a like-kind exchange or Starker exchange.
180-Day Exchange Period
The deadline by which an exchanger must close on their replacement property. Measured from the closing of the relinquished property sale OR the due date of the investor's tax return (including extensions), whichever comes first.
4
45-Day Identification Period
The strict deadline within which an exchanger must identify potential replacement properties in writing to their Qualified Intermediary. The 45 days begin on the day the relinquished property closes.
A
Accredited Investor
An individual or entity meeting SEC financial criteria: individuals with net worth exceeding $1 million (excluding primary residence) or annual income exceeding $200,000 ($300,000 for couples). Required for most DST and other private placement investments.
B
Basis
The original cost of an asset for tax purposes, adjusted for improvements, depreciation, and other factors. In a 1031 exchange, basis carries over to the replacement property, which is why gains are deferred rather than eliminated.
Boot
Cash or non-like-kind property received in a 1031 exchange that is taxable. Boot can result from receiving cash, debt reduction not replaced, or exchange of non-like-kind property. Receiving boot triggers partial taxation.
C
Cap Rate (Capitalization Rate)
A real estate valuation metric calculated by dividing Net Operating Income (NOI) by property value. Used to compare investment returns across properties. A 6% cap rate means the property generates 6% of its value in annual NOI.
Cash-on-Cash Return
A measure of investment performance calculated by dividing annual pre-tax cash flow by total cash invested. Unlike cap rate, this metric accounts for financing and shows return on actual dollars invested.
D
Debt Service Coverage Ratio (DSCR)
A metric measuring a property's ability to cover its debt payments, calculated by dividing NOI by total debt service. A DSCR of 1.25 means the property generates 25% more income than needed for debt payments.
Delaware Statutory Trust (DST)
A legally recognized trust established under Delaware law that holds title to real estate. DSTs allow multiple investors to own fractional beneficial interests in properties while maintaining 1031 exchange eligibility under IRS Revenue Ruling 2004-86.
Depreciation
A tax deduction allowing investors to recover the cost of real estate improvements over time (27.5 years for residential, 39 years for commercial). Depreciation reduces taxable income but also reduces basis, creating potential depreciation recapture upon sale.
Depreciation Recapture
When property is sold, previously claimed depreciation deductions are 'recaptured' and taxed at up to 25%. This tax applies regardless of actual gain and is one of the taxes deferred through a 1031 exchange.
Distribution
Cash payments made to investors from property income after operating expenses and debt service. DST distributions are typically paid monthly or quarterly and represent the investor's share of net rental income.
Due Diligence
The investigation and analysis process before making an investment decision. For DSTs, this includes reviewing the PPM, researching the sponsor, analyzing the property, understanding the debt structure, and consulting with financial professionals.
E
Exchange Accommodation Titleholder (EAT)
An entity that temporarily holds title to property during reverse or improvement exchanges. The EAT allows the exchange to proceed when the replacement property must be acquired before the relinquished property is sold.
I
Identification Rules
IRS rules governing how replacement properties can be identified: Three-Property Rule (up to 3 properties regardless of value), 200% Rule (any number if total value doesn't exceed 200% of relinquished property), or 95% Rule (any number if 95% is acquired).
L
Like-Kind Property
Property of the same nature or character for 1031 exchange purposes. For real estate, virtually any investment or business property can be exchanged for any other, regardless of property type. The properties must both be held for investment or business use.
M
Master Lease
A lease arrangement where a single tenant (often the sponsor or an affiliate) leases the entire property and is responsible for all rent payments, regardless of occupancy. This structure can provide income stability during lease-up periods.
Mortgage Boot
Taxable boot created when the debt on replacement property is less than the debt on the relinquished property. To avoid mortgage boot, investors must acquire replacement property with equal or greater debt, or add cash to offset the difference.
N
Net Lease
A lease structure where the tenant pays base rent plus some or all property expenses. Types include Single Net (property taxes), Double Net (taxes and insurance), and Triple Net (NNN - taxes, insurance, and maintenance).
Net Operating Income (NOI)
Property revenue minus operating expenses, excluding debt service and capital expenditures. NOI is a key metric for evaluating property performance and is used to calculate cap rates.
Non-Recourse Debt
Financing where the lender's only remedy in case of default is the property itself - the borrower has no personal liability. Most DST debt is non-recourse, protecting investors from personal liability beyond their investment.
P
Private Placement
A securities offering exempt from SEC registration, typically sold to accredited investors under Regulation D. DST investments are usually offered as private placements through broker-dealers.
Private Placement Memorandum (PPM)
The comprehensive disclosure document for a private securities offering. The PPM contains detailed information about the investment, risks, property, sponsor, fees, tax implications, and investor requirements. Must be carefully reviewed before investing.
Q
Qualified Intermediary (QI)
An independent third party who facilitates 1031 exchanges by holding sale proceeds and coordinating documentation. The exchanger cannot touch the funds directly. Also called an Exchange Accommodator.
R
Regulation D
SEC regulations providing exemptions from registration requirements for private securities offerings. Rule 506(b) and 506(c) are commonly used for DST offerings, with different requirements for investor solicitation and verification.
Relinquished Property
The property being sold in a 1031 exchange. Must have been held for investment or business use. The sale proceeds are held by the Qualified Intermediary until reinvested in replacement property.
Replacement Property
The property being acquired in a 1031 exchange. Must be identified within 45 days and acquired within 180 days. Must be like-kind (investment or business real estate) and have equal or greater value and debt to fully defer taxes.
Reverse Exchange
A 1031 exchange where the replacement property is acquired before selling the relinquished property. Requires an Exchange Accommodation Titleholder to hold title temporarily. More complex and expensive than a forward exchange.
S
Seven Deadly Sins
IRS-imposed restrictions on DSTs to maintain 1031 exchange eligibility: no new capital contributions, no renegotiation of debt, no reinvestment of proceeds, no disposition of assets other than in the normal course of business, no new leases beyond 2 years, no major property improvements, and no borrowing beyond initial debt.
Sponsor
The company that organizes, structures, and manages a DST offering. The sponsor identifies properties, arranges financing, creates the trust structure, manages operations, and eventually sells the property. Sponsor quality is critical to investment success.
Step-Up in Basis
Upon an investor's death, the cost basis of inherited property is adjusted to current fair market value. This can eliminate deferred capital gains from prior 1031 exchanges, making the exchange a powerful estate planning tool.
T
Tenant-in-Common (TIC)
A form of fractional real estate ownership where multiple investors hold undivided interests in property. Limited to 35 investors by IRS guidelines. TIC investors may have voting rights, unlike passive DST investors.
Triple Net Lease (NNN)
A lease where the tenant pays all property expenses: property taxes, insurance, and maintenance, in addition to base rent. Common for single-tenant retail, industrial, and medical properties. Provides predictable income for investors.
U
UPREIT (721 Exchange)
A structure allowing investors to exchange DST interests for operating partnership units in a Real Estate Investment Trust (REIT) upon property sale. This provides potential liquidity and diversification while continuing to defer capital gains taxes.
Related Resources
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