Homestead Escrow & Exchange

§ 1031 Terminology

Relinquished Property: Sometimes also referred as "Exchange Property", this is the property that the taxpayer is selling or will be disposing of to purchase or acquire the replacement property.

Replacement Property: The property that the taxpayer will acquire (roll into) as a result of the exchange.

Qualified Intermediary: A person or entity who assists the exchanger to effect a tax-deferred exchange by preparing the necessary agreements, holding the exchange proceeds in an unconditional escrow account and acting as the principal in the sale of the relinquished property and the purchase of the replacement property. The intermediary cannot be the taxpayer, a related party or an agent of the taxpayer.

Boot: The money or the fair market value of "other property" received by the taxpayer in an exchange. "Cash boot" is the receipt of cash and "mortgage boot" (also referred to as debt relief) is a reduction in the Exchanger's mortgage liabilities on a replacement property. "Other property" is property that is non-like-kind, such as personal property received in an exchange of real property, property used for personal purposes, or "non-qualified property." "Other property" also includes such things as a promissory note received from a buyer (Seller Financing).

Constructive Receipt: Under the 1031 regulations, the Exchanger must not have control over the exchange proceeds or property during the exchange period. Constructive Receipt occurs in an exchange when a taxpayer has the unrestricted right to access cash or boot, whether or not such right is exercised, and regardless of whether there is actual or physical receipt of the cash or boot. Any cash or boot received by the exchanger will cause recognition of gain and may disqualify the exchange.
Direct deeding: Procedure approved by the IRS wherein the taxpayer, the buyer, and the seller are able to deed to each of the respective parties instead of the Qualified Intermediary, the principal in the exchange. (Direct deeding streamlines the exchange process, period.)

Safe harbors: There is more than one way to structure a tax-deferred exchange" under I.R.C. Section 1031. However, the 1991 "safe-harbor" Regulations established procedures which include the use of an Intermediary, direct deeding, the use of qualified escrow accounts for temporary holding of exchange funds and other procedures which now have the official blessing of the IRS.
Thus, it is desirable to structure exchanges so that they can be in harmony with the 1991 Regulations (i.e.,employment of a Qualified Intermediary to facilitate the exchange).