§ 1031 (Like-Kind Exchange) – Non-Recognition

Non-Recognition - §1031 Exchanges are an exception to the general rule in §1001(c)

General - Realized gain/loss not recognized if: §1031(a)
(1) Real property held in Trade or Business, or for investment is,
Not - Real Property held primarily for sale [if property is like inventory] §1031(a)(2) Mauldin
Not - Personal Use
(2) Exchanged “solely for” [Boot consideration is acceptable §1.1031(a)–1(a)(2)]
(3) (Received) Real Property to be held in T or B, or for investment, and
Property held in Trade/Business may be exchanged for investment property §1.1031(a)–1(a)
What transferor does from transferee's perspective [TP] with property before transfer is irrelevant Rev. Rul. 77-297
(4) Properties are of a “like kind” to each other (but see 1031(b))
All real property is considered like kind
Crichton - Unimproved country land is like kind to improved city lot
Not Foreign Property - Real property located within US & property located outside US are not like kind §1031(h)
Amount Recognized in Exchange - If No Boot - No Gain or Loss recognized on Transfer
If Boot Received - Boot received is recognized as gain equal to its FMV, but only up to the amount realized §1031(b)
Amount Realized - Difference between TP's basis in property given & FMV of property received. Boot up to that amount
is recognized.
T exchanges property bought for $5k, FMV of $8k; for property with FMV of $6k & $2k cash boot. Realizes $3k Gain,
but only recognizes $2k of Cash received
Gain Recognized will not exceed the sum of cash & FMV of property received in exchange §1.1031(b)–1(a)
Assumption of Debt - If TP's liability is assumed by another, amount assumes is considered money received by
TP §1031(d)
Loss - No loss is recognized, even if boot is received §1031(c)
Basis of Qual. Prop - Basis of property given [§1012] (minus) money received (plus) gain/loss recognized (loss only
recognized for boot basis) §1031(d)
Basis if Boot given - Basis of property acquired, is the property given, increased by the value of boot given in
exchange §1.1031(d)–1(a)
Basis of Boot Received - FMV on date of exchange of non-cash boot is deducted from basis of qualified property
received §1031(d)
Boot Property received carried a basis equal to its FMV on the date of the exchange §1031(d)
Basis of Qualified Property Received - Remaining basis after reduction for Boot basis §1031(d)
Example. A transfers real estate which he purchased for $10k in exchange for other real estate with FMV of $9k, a car
with FMV of $2k, and $1,500 in cash. A realizes a gain of $2,500, all of which is recognized under section 1031(b). Basis
of the property received in exchange is the basis of the real estate A transfers ($10,000) decreased by the amount of money
received ($1,500) and increased in the amount of gain that was recognized ($2,500), which results in a basis for the
property received of $11,000. This basis of $11,000 is allocated between the automobile and the real estate received by A,
the basis of the automobile being its fair market value at the date of the exchange, $2,000, and the basis of the real estate
received being the remainder, $9,000.
Holding Period - Time property given was held is counted in holding period of property received §1223(1)
Holding Period for Boot - Doesn't tack FMV basis applies §1223(1)
Connection to §121 Sale of Princ. Residence - TP must wait 5 years before using the §121 Exclusion §121(d)
Three-Cornered Exchanges under §1031
A has Blackacre; B wants Blackacre but only has Cash; and A wants White Acre which is owned by C
B buys Whitacre and then B & A do a 'like kind' exchange
A gets benefit of 1031; B does not, because property not held for investment or business reasons [but gain/loss
may offset]
Permitted Under - Rev. Rul. 77-297
Requirements - (1) Identification Period & (2) Exchange Period §1031(a)(3)
Identification Period - Property received in exchange must be identified within 45 days after day TP transfers property that
is to be relinquished §1031(a)(3)(A)
Exchange Period - TP must receive the new property either within 180 days after the date of transfer, or by due date of the
tax return for the year of the transfer [including extensions] §1031(a)(3)(B)