Like-Kind Exchanges Under IRC Code Section 1031
WASHINGTON — Whenever you sell business or investment property and you have a gain, you generally have to pay tax
on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on
the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred
in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.
exchange can include like-kind property exclusively or it can include like-kind property along with cash,
liabilities and property that are not like-kind. If you receive cash, relief from debt, or property that is not
like-kind, however, you may trigger some taxable gain in the year of the exchange. There can be both deferred
and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser
fact sheet, the 21st in the Tax Gap series, provides additional guidance to taxpayers regarding the rules and
regulations governing deferred like-kind exchanges.
qualifies for the Section 1031 exchange?
of investment and business property may qualify for a Section 1031 deferral. Individuals, C corporations, S
corporations, partnerships (general or limited), limited liability companies, trusts and any other taxpaying
entity may set up an exchange of business or investment properties for business or investment properties under
are the different structures of a Section 1031 Exchange?
accomplish a Section 1031 exchange, there must be an exchange of properties. The simplest type of Section
1031 exchange is a simultaneous swap of one property for another.
Levenson notes: Simple, in theory, and of the
thousands of 1031 exchanges in which I have been involved as a Qualified Intermediary, I have seen and been
involved in exactly two. In general,
Seller/Taxpayers want to dispose of their property and it is much, much more difficult to find someone who both
(a) wants their property, and (b) has a property that Seller/Taxpayer wants in return. In general, it just does not happen. And we make a deferred exchange so easy that basically all
exchanges are deferred exchanges, despite the comment by the IRS immediately below.]
exchanges are more complex but allow flexibility. They allow you to dispose of property and subsequently
acquire one or more other like-kind replacement properties.
qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply
selling one property and using the proceeds to purchase another property (which is a taxable transaction).
Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement
property must be mutually dependent parts of an integrated transaction constituting an exchange of
property. Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange
agreements pursuant to rules provided in the Income Tax Regulations. .
reverse exchange is somewhat more complex than a deferred exchange. It involves the acquisition of
replacement property through an exchange accommodation titleholder, with whom it is parked for no more than 180
days. During this parking period the taxpayer disposes of its relinquished property to close the
property qualifies for a Like-Kind Exchange?
the relinquished property you sell and the replacement property you buy must meet certain
properties must be held for use in a trade or business or for investment. Property used primarily
for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind
properties must be similar enough to qualify as "like-kind." Like-kind property is property of the same
nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other
real estate. For example, real property that is improved with a residential rental house is like-kind to
vacant land. One exception for real estate is that property within the United States is not like-kind to
property outside of the United States. Also, improvements that are conveyed without land are not of like
kind to land.
property and personal property can both qualify as exchange properties under Section 1031; but real property can
never be like-kind to personal property. In personal property exchanges, the rules pertaining to what qualifies
as like-kind are more restrictive than the rules pertaining to real property. As an example, cars
are not like-kind to trucks.
Notes: My favorite examples of this are that a
propeller airplane is not like-kind to a jet and male livestock is not like-kind to female
certain types of property are specifically excluded from Section 1031 treatment. Section 1031 does not apply to
· Inventory or
stock in trade
bonds, or notes
securities or debt
are the time limits to complete a Section 1031 Deferred Like-Kind Exchange?
a like-kind exchange does not have to be a simultaneous swap of properties, you must meet two time limits or the
entire gain will be taxable. These limits cannot be extended for any circumstance or hardship except in
the case of presidentially declared disasters.
first limit is that you have 45 days from the date you sell the relinquished property to identify potential
replacement properties. The identification must be in writing, signed by you and delivered to a person
involved in the exchange like the seller of the replacement property or the qualified intermediary.
However, notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not
properties must be clearly described in the written identification. In the case of real estate, this means
a legal description, street address or distinguishable name. Follow the IRS guidelines for the maximum number
and value of properties that can be identified.
second limit is that the replacement property must be received and the exchange completed no later than 180 days
after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax
year in which the relinquished property was sold, whichever is earlier. The replacement property received must
be substantially the same as property identified within the 45-day limit described above.
there restrictions for deferred and reverse exchanges?
is important to know that taking control of cash or other proceeds before the exchange is complete may
disqualify the entire transaction from like-kind exchange treatment and make ALL gain immediately
cash or other proceeds that are not like-kind property are received at the conclusion of the exchange, the
transaction will still qualify as a like-kind exchange. Gain may be taxable, but only to the extent of the
proceeds that are not like-kind property.
way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange
facilitator to hold those proceeds until the exchange is complete.
can not act as your own facilitator. In addition, your agent (including your real estate agent or broker,
investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities
within the previous two years) can not act as your facilitator.
do you compute the basis in the new property?
is critical that you and your tax representative adjust and track basis correctly to comply with Section 1031
is deferred, but not forgiven, in a like-kind exchange. You must calculate and keep track of your basis in the
new property you acquired in the exchange.
basis of property acquired in a Section 1031 exchange is the basis of the property given up with some
adjustments. This transfer of basis from the relinquished to the replacement property preserves the
deferred gain for later recognition. A collateral affect is that the resulting depreciable basis is
generally lower than what would otherwise be available if the replacement property were acquired in a taxable
the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus
any additional gain realized since the purchase of the replacement property, is subject to tax.
do you report Section 1031 Like-Kind Exchanges to the IRS?
must report an exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with your tax
return for the year in which the exchange occurred.
8824 asks for:
of the properties exchanged
that properties were identified and transferred
relationship between the parties to the exchange
of the like-kind and other property received
or loss on sale of other (non-like-kind) property given up
received or paid; liabilities relieved or assumed
basis of like-kind property given up; realized gain
you do not specifically follow the rules for like-kind exchanges, you may be held liable for taxes, penalties,
and interest on your transactions.
a tax professional or refer to IRS publications listed below for additional assistance with IRC Section 1031
and Other Dispositions of Assets
Like-Kind Exchanges (PDF)
Sales of Business Property
Excerpts from IRS Fact Sheet