Real Estate
Taxfree Exchanges Under Section 1031 (567 - 3rd) (TPOR567)
Portfolio Description
Tax Management Portfolio, Taxfree Exchanges Under Section 1031, No. 567-3rd, analyzes the nontaxable exchange provisions of §1031 of the Internal Revenue Code. The Portfolio's analysis of §1031 includes a discussion of the types of property that do and do not qualify for nonrecognition treatment; the concepts of "like-kind," "boot" and "exchange"; the deferred exchange rules; the rules relating to the allocation of boot; and the determination of the basis and holding period of properties received in such exchanges. The Portfolio also discusses the problems involved in sale and leaseback transactions, multi-party exchanges, multi-asset exchanges, and reverse exchanges.
Section 1031 provides that the exchange of certain types of property will not result in the recognition of gain or loss. The property exchanged and received in the transaction must be of like kind and must be held either for investment or for productive use in the taxpayer's trade or business; however, such property does not include stock in trade or other property held primarily for sale, partnership interests, stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, and other securities or evidences of indebtedness or interest.
Gain is recognized in a transaction which otherwise qualifies under §1031 if, in addition to nonrecognition property, the taxpayer receives other property, so-called "boot." Losses, as a general rule, are not recognized in a transaction that qualifies under §1031. However, if the taxpayer surrenders boot in addition to qualifying property, gain or loss is recognized on the boot surrendered. Although a liability of the transferor assumed by the transferee is deemed boot to the transferor, the regulations permit netting of boot given against such a liability.
Section 1031 establishes certain basis rules: in general, the property received acquires the basis (and holding period) of the properties surrendered, (i) reduced by any money received or liabilities assumed by the transferee to the exchange, and by any loss recognized to the transferor, and (ii) increased by the amount of gain recognized to the transferor. The basis as thus computed is allocated first to the "boot" property received to the extent of fair market value, the remaining basis being allocated among the nonrecognition properties received, apparently in proportion to relative fair market values as of the date of the exchange.
This Portfolio may be cited as Levine, 567-3rd T.M., Taxfree Exchanges Under Section 1031.
Howard J. Levine, B.A., Hunter College (1969); J.D., State University of New York at Buffalo (cum laude, 1972); LL.M. (Taxation), Georgetown University Law Center (1976); attorney, Office of Chief Counsel, Internal Revenue Service (1972-1976); adjunct lecturer in Real Estate Taxation, American University Law School (1980-1982); adjunct professor, The George Washington University Law School and Georgetown University Law Center LL.M. Tax Programs (1982-1993); contributing editor, The Journal of Real Estate Taxation; Tax Management Distinguished Author (2000); member, Advisory Board, Tax Management International Journal; partner, Roberts & Holland LLP, Washington, D.C. and New York; member, American Bar Association (Chairman, Committee on Sales, Exchanges and Basis, and Subcommittee Chairman, Like Kind Exchanges, Tax Section 1990-1994), New York Bar, District of Columbia Bar, International Fiscal Association.
