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BASIC STATUTORY REQUIREMENTS OVERVIEW
Type of property requirement.
Only a transfer of property is subject to like-kind exchange treatment;
provision of services is not. Neither the property relinquished
nor the property received may be a type of property expressly excluded
from the statute .
Qualified use requirement.
Both the property relinquished and the property received in the
exchange must be held by the taxpayer for productive use in a trade
or business or for investment at the time of the exchange
Like-kind requirement. The
property received in the exchange transaction must be of like-kind
to the relinquished property.
Exchange requirement. The
transaction must be an exchange of relinquished property for replacement
property, not a sale of the relinquished property followed or preceded
by a purchase of another property.
Time requirement. If the
exchange is nonsimultaneous, the replacement property must be
(a) identified no later than 45 days after the date on which the
relinquished property is transferred and
(b) received by the taxpayer on or before the earlier of
(1) 180 days after the date on which the
taxpayer transfers the relinquished property or
(2) the due date, including any allowable extensions, for the
taxpayer's tax return for the taxable year in which the relinquished
property is transferred.
Thus, two basic calculations must always be
made to evaluate the overall tax consequences of an exchange:
• Realized gain must be computed
to find the amount of gain from disposition of the taxpayer's
relinquished property that is potentially subject to tax and
• Recognized gain must be computed to ascertain whether
any of the realized gain will he taxed.
Losses are not recognized in a like-kind exchange under §1031
even if money or other nonqualifying property (i.e., property
that is either not like-kind, not held for investment or use in
a trade or business, or is statutorily excluded) is received in
the exchange. If, however, a taxpayer transfers nonqualifying
property in the exchange, in addition to qualifying property,
losses may be recognized as if the nonqualifying property had
been sold.
NOTE* In reviewing the gain realization and
recognition rules established by Treasury Regulations, Revenue Rulings,
and court decisions, .the attorney should remember that a two-party
ex-change paradigm often serves as the basis for analysis. Conforming
application of these rules to fit .modern multiparty ex-changes,
most of which are deferred, is thus often necessary.
Although IRC §1031 generally defers
the recognition of gain or loss on the exchange of like-kind property,
a taxpayer who receives money or other property in addition to the
like-kind property recognizes gain, but not loss, to the extent
of the sum of the money and the fair market value of the other property
received, Losses are not recognized even if the taxpayer receives
money or other non-like-kind property in the exchange. If however,
a taxpayer gives up non-like-kind property (other than cash) together
with the like-kind property, loss is recognized to the extent that
the adjusted basis of the non-like-kind property transferred exceeds
its fair market value (just as loss would be recognized if the non-like-kind
property were sold).
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