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VI.
GENERAL BUSINESS ISSUES
A.
Section 1031
1. Tax-free
rollover of like-kind property
Present
Law
In
general
An
exchange of property, like a sale, generally is a taxable transaction.
However, present law provides that no gain or loss is recognized
if property held for productive use in the taxpayer's trade or
business, or property held for investment purposes, is exchanged
for property of a like kind that is also held for productive use
in a trade or business or for investment.(footnote
520) This provision does not apply to exchanges of
stock in trade or other property held primarily for sale, to stocks,
bonds, partnership interests, choses in action, certificates of
trust or beneficial interest, other securities or evidences of
indebtedness or interest, or to certain exchanges involving livestock
or involving foreign property.
The
nonrecognition of gain in a like-kind exchange applies only to
the extent that like-kind property is received in the exchange.
For example, if a taxpayer holding land A having a basis of $40,000
and a fair market value of $100,000 exchanges the property for
land B worth $90,000 plus $10,000 in cash, the taxpayer would
recognize $10,000 of gain on the transaction, which would be includable
in income. The remaining $50,000 of gain would be deferred until
the taxpayer disposes of land B in a taxable sale or exchange.
No losses may be recognized from a like-kind exchange.
Deferred
like-kind exchanges
A
like-kind exchange does not require that the properties be exchanged
simultaneously. Rather, present law requires that the property
to be received in the exchange be received not more than 180 days
after the date on which the taxpayer relinquishes the original
property (but in no event later than the due date (including extensions)
of the taxpayer's income tax return for the taxable year in which
the transfer of the relinquished property occurs). In addition,
the taxpayer must identify the property to be received within
45 days after the date on which the taxpayer transfers the property
relinquished in the exchange.
The
Treasury Department has issued regulations (footnote
521) providing guidance and safe
harbors for taxpayers engaging in deferred like-kind exchanges.
These regulations allow a taxpayer who wishes to sell appreciated
property and reinvest the proceeds in other like-kind property
to engage in "three-way" exchanges. For example, if taxpayer A
wishes to sell his appreciated apartment building and acquire
a commercial building, taxpayer A may transfer his apartment building
to buyer B. Buyer B (directly or through an intermediary) agrees
to purchase from (NEXT PAGE)
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520
Sec. 1031.
521 Treas. Reg. sec. 1.1031(k)-1(a) through (o).
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