Real Estate Investment Trust Glossary

A 1031 exchange, also known as a like-kind exchange, is a tax-deferred transaction that allows real estate investors to sell one property and purchase another "like-kind" property without paying capital gains taxes on the sale.

To qualify for a 1031 exchange, both the relinquished property (the property being sold) and the replacement property (the property being purchased) must be held for investment or business purposes. The exchange must also meet several other requirements, such as using a qualified intermediary to facilitate the transaction and identifying the replacement property within 45 days of the sale of the relinquished property.

The benefit of a 1031 exchange is that it allows real estate investors to defer paying capital gains taxes on the sale of their property, allowing them to reinvest their funds into a new property and potentially generate more income and profits. However, it's important to note that eventually, the investor will have to pay capital gains taxes on the sale of the replacement property, unless they do another 1031 exchange.

Something owned that has value

The fixed rent amount that a tenant pays to the landlord for the use of the property.

The legal requirements for building and maintaining a property

A type of lease in which a building is constructed to meet the specific needs of a tenant.

The expenses incurred to maintain common areas in a property such as lobbies, parking lots, and other shared spaces.

Capital expenditures, or large expenses required to maintain or improve a property

Large expenses required to maintain or improve a property

A capital gain refers to the profit that an investor makes from the sale of an investment property that has appreciated in value over time. This capital gain is typically subject to taxes, but by utilizing a 1031 exchange, investors can defer those taxes by reinvesting the proceeds from the sale into another like-kind property.

To qualify for a 1031 exchange, the new property must be similar in nature and purpose to the old property, and the entire proceeds from the sale must be reinvested into the new property. By deferring the capital gains taxes through a 1031 exchange, investors can continue to grow their real estate investments without having to pay taxes on the gains until they sell the new property.

A capital gain or loss refers to the difference between the amount paid for a property and the amount received when it is sold. If the selling price is higher than the purchase price, the taxpayer has a capital gain, and if the selling price is lower than the purchase price, the taxpayer has a capital loss.

In a 1031 exchange, the capital gain or loss on the relinquished property is deferred rather than realized, meaning that the taxpayer does not have to pay taxes on the gain or loss at the time of the sale. Instead, the gain or loss is carried forward and applied to the replacement property acquired in the exchange. This can provide significant tax benefits to taxpayers who are looking to sell one property and acquire another.

Capital Gain Tax refers to the tax imposed on the profit realized from the sale of an asset that has increased in value over time. In the context of a 1031 exchange, a capital gain tax would apply to the difference between the sale price of the original property and its adjusted basis (i.e., the original cost plus any capital improvements made during ownership).

However, if the property owner uses the proceeds from the sale of the original property to acquire a like-kind replacement property through a 1031 exchange, they may be able to defer paying capital gain taxes on the sale of the original property until the sale of the replacement property. This allows them to reinvest the full sale proceeds into the new property, thus maximizing their investment potential.

The ratio used to determine the value of an income-producing property based on its net operating income.

Cash flow refers to the net amount of cash and cash-equivalent assets that flow in and out of a 1031 exchange property. It takes into account all of the income generated by the property, as well as any expenses associated with owning and managing the property. This includes rental income, operating expenses, mortgage payments, and taxes. Understanding the cash flow of a property is important in a 1031 exchange because it can impact the amount of potential gain or loss realized by the taxpayer. If a replacement property has a positive cash flow, it can help offset any potential losses from the relinquished property, while a negative cash flow may result in additional expenses for the taxpayer. It is important for taxpayers to carefully evaluate the cash flow of any potential replacement property before making a decision in a 1031 exchange.

A measure of a property’s return on investment based on the cash invested

Commercial property refers to real estate that is used for business or investment purposes, such as office buildings, retail spaces, industrial properties, and multi-family residential buildings. In the context of a 1031 exchange, commercial property is a type of like-kind property that can be exchanged for another qualifying commercial property without triggering immediate capital gains taxes.

A 1031 exchange, also known as a like-kind exchange, is a tax-deferred transaction that allows an investor to sell one investment property and use the proceeds to purchase another like-kind property. By doing so, the investor can defer paying capital gains taxes on the sale of the first property until they sell the replacement property. To qualify for a 1031 exchange, both the original property and the replacement property must be held for business or investment purposes and must be of like-kind.

Debt service refers to the amount of money required to make mortgage payments on a property, including principal and interest.

When a property owner decides to participate in a 1031 exchange, they may choose to use some or all of the proceeds from the sale of their property to acquire a replacement property. If they choose to finance the replacement property with a mortgage, the debt service on that mortgage is an important factor to consider.

The debt service is typically calculated on a monthly basis and is based on the outstanding principal balance of the mortgage, as well as the interest rate and loan term. Property owners should carefully consider the debt service of any potential replacement property to ensure that it is manageable and fits within their overall investment strategy.

A legal document that transfers ownership of a property from one party to another.

The decrease in value of an asset over time, used for tax purposes.

A payment made by a corporation to its shareholders.

A DownREIT (Down Real Estate Investment Trust) is a financial structure used in real estate investing where a property owner contributes their property to an operating partnership, in exchange for units in the partnership. The partnership then leases the contributed property to a newly formed REIT, which issues shares to the public and uses the proceeds to purchase the property from the partnership. The property owner can then exchange their units in the partnership for shares in the REIT, effectively "downstreaming" the value of their property into the REIT. This allows the property owner to defer capital gains taxes and diversify their investments while still maintaining an interest in the property. DownREITs were popularized in the 1990s as a tax-efficient way for property owners to monetize their real estate holdings.

Debt service coverage ratio, a measure of a property’s ability to cover its debt payments

Due diligence is a crucial part of the 1031 exchange industry that involves conducting a thorough investigation and analysis of a potential replacement property before completing a 1031 exchange transaction.

During due diligence, a taxpayer and their qualified intermediary will typically review and verify important information about the replacement property, such as its title, condition, location, and potential income and expenses. This process can also include inspections, appraisals, and assessments of any potential risks or liabilities associated with the property.

The purpose of due diligence is to ensure that the taxpayer fully understands the risks and benefits of the replacement property and can make an informed decision about whether or not to proceed with the exchange. It also helps to minimize the potential for any surprises or unexpected issues to arise after the exchange is complete.

A clause in a mortgage that allows the lender to demand repayment of the loan if the property is sold

The value of a property minus any outstanding debt or liens.

A type of REIT that primarily invests in real estate and generates income through rent

The practice of buying a property with the intention of quickly reselling it for a profit

A type of lease where the landlord is responsible for all expenses related to the property, including CAM, taxes, insurance, and maintenance.

A measure of a property’s value based on its gross rental income

A type of lease where the tenant leases the land and is responsible for constructing the building and paying for all associated expenses.

A type of REIT that invests in both real estate and mortgages

A property that generates rental income

The cost of borrowing money, paid by the borrower to the lender.

A measure of a property’s overall return on investment

The owner or manager of a property who leases it to a tenant.

A contract between a landlord and tenant that sets forth the terms and conditions of a rental agreement.

The amount of rent charged to a tenant

The process of extending a lease agreement for another period of time.

The length of time a lease is in effect

The process of ending a lease agreement

Loan-to-value ratio, the ratio of a property’s loan amount to its market value

The price a willing buyer and seller would agree upon for a property in the current market.

A property that combines both commercial and residential uses

A loan used to purchase property, which is secured by a lien on the property.

A type of REIT that primarily invests in mortgages and generates income through interest payments

Securities that are backed by a pool of mortgages

A property with multiple residential units

A lease in which the tenant is responsible for paying operating expenses, such as property taxes, insurance, and maintenance.

The income generated by a property after deducting operating expenses but before deducting debt service.

The percentage of a property’s income that is left after expenses

A REIT that is not listed on a public stock exchange

The percentage of units in a property that are rented

The costs associated with operating a property, such as utilities, maintenance, and management fees.

A unit of ownership in a partnership that owns a REIT’s properties

Rent that is calculated as a percentage of the tenant's gross sales.

The amount of money borrowed in a mortgage

A REIT that is privately owned and not available to the general public

The management and operation of a property, including leasing, maintenance, and accounting.

A REIT that is listed on a public stock exchange

The pattern of ups and downs in the real estate market

Replacing an existing mortgage with a new one

Real Estate Investment Trust

An index that tracks the performance of a group of REITs.

Regulations that limit how much a landlord can charge for rent

A property used for housing purposes

A property with one residential unit

A lease agreement between a tenant and a third party for a portion of the leased space.

The individual or entity who leases the property from the landlord.

Improvements made to a rental property to meet the specific needs of a tenant

The process of evaluating potential tenants before renting to them

The legal right to ownership of a property

Insurance that protects against any issues with the title of a property

A property that is ready to rent out immediately, without needing any repairs or renovations

The process of evaluating the risk and potential of an investment.

The percentage of available space in a property that is not leased.

The practice of finding and contracting properties and then selling them to other investors for a profit without taking ownership.

The legal regulations that govern how a property can be used

Amortization is paying off debt over a period of time with a fixed repayment schedule in regular installments. Monthly mortgage payments are often comprised of primarily interest at the beginning of the loan term, with the principal component increasing with each subsequent payment.

For example, a $100,000 mortgage with a 5.0% interest rate and 30-year amortization schedule would consist of monthly payments of $536.82. The month one payment would allocate $416.67 to interest ($100,000 balance multiplied by the 5.0% interest rate divided by 12 months) and the balance of $120.15 would be applied toward principal reduction.

In month two, the principal balance would be reduced to $99,879.85 ($100,000 beginning balance less the $120.15 principal payment from month one) and the monthly payment would be allocated $416.17 to interest ($99,879.85 balance multiplied by the 5.0% interest rate divided by 12 months) and the balance of $120.65 applied toward principal reduction.

Appreciation is the increase in the value of an asset over time, which can be affected by a number of factors such as increased demand, weakening supply, or changes in inflation.