Like-Kind Exchanges of Property -
New Regulations Under Section 1031

A like-kind exchange is a transfer of property that is held for investment or income in return for other property held for similar purposes. An exchange completed under the guidelines of Internal Revenue Code Section 1031 is exempt from the general rule requiring recognition of gain or loss realized on the sale or exchange of property. The primary benefit of such a transaction is obvious -- no capital gains tax.

To qualify for a tax-free exchange, the purchase price of the replacement property must be equal to or greater than the net sale price of the relinquished property, and all equity received from the sale of the relinquished property must be used to acquire the replacement property. Excluded property that cannot be exchanged includes stock in trade, stocks, bonds or notes, other securities or evidences of indebtedness or interest, interests in a partnership, certificates of trust or beneficial interests.

All real property, whether improved or unimproved, is considered to be like-kind. Property held outside of the U.S. and its territories does not qualify as like-kind with property held within the U.S.

Asset Classes

If an exchange is a business or personal property exchange, property must be categorized into either Asset Classes or Product Classes in order to determine qualification of like-kind property. Asset classes as determined in the Treasury Regulations are as follows:

· Office furniture, fixtures and equipment

· Information systems (computers, peripherals)

· Airplanes (except commercial), helicopter

· Railroad cars & locomotives

· Tractor units for use over the road

· Vessels, barges, tugs and similar equipment

· Light general purpose trucks

· Heavy general purpose trucks

· Automobiles, taxis

· Buses

· Trailers

Product Classes

Product classes and codes are set forth in the Standard Industrial Classification and are designed to classify enterprises by the type of activity in which they are engaged. The codes are classed under the headings:

· Agricultural, Forestry and Fishing

· Construction

· Transportation and Public Utilities

· Retail Trade

· Services

· Mining

· Manufacturing

· Wholesale Trade

· Finance, Insurance and Real Estate

In an exchange transaction, non-qualifying property, cash, and liability relief is called "boot" and does not qualify for tax exemption. Transfer of boot along with qualifying property in an exchange will not affect the status of the like-kind elements.

Holding Periods

There is currently a great deal of uncertainty as to how long one must hold property before it can be exchanged. Section 1031(a) states that an exchange of like-kind property is to be held for productive use or investment. It is generally agreed that property should be held for a period of at least one year. If property received in a 1031 exchange is promptly disposed of in a non-taxable transaction, the property will not qualify for nonrecognition because it was not held for the required purpose. If a taxpayer exchanges property with a related person in a 1031 exchange and the related person disposes of the property within 2 years after the date of the last transfer, the exchange will no longer qualify for non-recognition status. Exceptions to this rule include dispositions that occur due to the death of either party, compulsory or involuntary conversion of the exchanged property, or any disposition or exchange that was not designed to avoid federal income tax.

Types Of Exchanges

A Simultaneous Exchange is a simple two-party exchange where the relinquished property and replacement property are closed and recorded on the same day. Simultaneous exchanges are difficult to arrange and rarely occur any more. A Delayed Exchange is often referred to as Starker exchange. It is now the most common type of exchange. In a delayed exchange, the relinquished property is sold and after a time period the replacement property is acquired. A Three-Cornered Exchange involves three parties -- the taxpayer who wishes to dispose of property; the buyer who wishes to acquire the taxpayer's property; and, the vendor of the property the taxpayer wishes to acquire. A Four-Party Exchange involves the same parties as a three-cornered exchange in addition to an intermediary.

Provided as an educational service by John Raymond Dunham, III, Esq..

This publication is intended to serve you. If you would like certain topics covered, or have any questions or comments, you are invited to contact Mr. Dunham at: 941.951.1800, Ext. 250, Facsimile: 941.366.1603, E-Mail:, Web site: or write him at LUTZ, BOBO, TELFAIR, DUNHAM & GABEL, Two North Tamiami Trail, Sarasota, FL 34236.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered and report on issues and developments in the law. It is not intended as legal advice, and should not be relied upon without consulting an attorney.