New 9/18/07

Tax (often capital gain) normally results when property is sold or exchanged.

IRC § 1031 provides for deferral (NOT forgiveness) of tax where property that is “held for productive use in a trade or business, or investment” (“relinquished property“) is “exchanged” for “like-kind” property (“replacement property“). The reasoning is that the proper time to impose tax when the “investment” has not been reached where the “investment” is not “finally” disposed of. Tax is ultimately due when the property is disposed of and not replaced.

The rules to qualify are complex and detailed, and “small” errors can result in not qualifying for like-kind exchange treatment and immediate recognition of gain.

Holding period

The replacement property must be acquired with the intent to “hold” it for trade or business, or for investment, and NOT for resale. The holding period of the relinquished property is “tacked” onto the replacement property holding period to determine tax treatment.


To qualify property must be of the “same nature or character”. Real property is generally like-kind to other real property, including long term leases of 30 years or longer. But, real property located in the US is not like-kind to property located outside the US.

Personal property is not like-kind to real property.

Sales a business may have to be separated into two like-kind transactions of: 1. real estate exchanged for real estate, and 2. personal property for like-kind personal property.

Other combinations are not necessarily intuitive, e.g.: male cows are not like-kind to female cows; book copyrights are not like-kind to song copyrights.

Excluded property

Non-recognition treatment is NOT available for:

  • property used for personal purposes (e.g., your primary or second residence) (it is possible to convert personal use property to trade or business or investment property, and must be supported by actual activity and time of such use)
  • property held for sale
  • stocks, bonds
  • notes
  • certificates of trust
  • beneficial interest
  • partnership interests
  • securities
  • evidences of debt

No constructive receipt / escrow of exchanged property proceeds

The taxpayer can not actually or “constructively” receive cash or other property and then use the proceeds to purchase the replacement property. This includes the “down payment”. The proceeds must be escrowed or otherwise placed beyond taxpayer’s reach during the transaction.

Simultaneous exchange

The most straight forward transaction is a simultaneous three party exchange with taxpayer transferring the relinquished property to the buyer, and the replacement property seller transferring that property to the taxpayer.

Deferred exchange

The acquisition of the replacement property can be delayed after the disposition of the relinquished property if the replacement properly is:

  • identified within 45 days;
  • acquired within 180 days; and
  • the proceeds from disposition of the relinquished property is escrowed with a “qualified intermediary” (or another safe harbor met).

Parking transactions / “reverse Starker exchange”

Rev. Proc 2000-37 provides that taxpayer can acquire the replacement property prior to disposing of the relinquished property. The taxpayer “parks” the replacement property with a third party (“accommodation party”) until the taxpayer arranges for the transfer of the relinquished property to the ultimate transferee in a simultaneous exchange.

Identifying property

Replacement property must be identified with sufficient particularly (unambiguously) before the end of the 45 day “identification period”. The taxpayer may identify

  • any number of properties aggregating up to 200% of the value of the relinquished property, or
  • any three properties regardless of value.

An identified property can be “de-identified” before the end of the identification period and another property identified in its place.

Qualified intermediary

Generally the proceeds must be placed with a “qualified intermediary” (unrelated and not e.g., the taxpayer’s attorney or accountant).


If the taxpayer receives any cash or non like-kind property( “boot”), gain is recognized to the extent of the cash or market value of the “other” property. The gain is not prorated (i.e., gain is recognized for the entire amount of .

Direct deeding

In a three party exchange is is not necessary for the replacement property seller to deed to the relinquished property buyer and then in turn to the taxpayer. The replacement property seller can direct deed to the taxpayer. The relinquished property buyer generally prefers this so they do not have to be in the “chain of title” of the replacement property and expose themselves e.g., to environmental or other issues.


The amount of “net” reduction in debt, debt against the relinquished property reduced by debt assumed with the replacement property, is treated as “boot” and gain recognized. There are limitations on acquisition of replacement property followed by taking out new debt.

Related persons

Limitations apply to exchanges between related persons (including related or controlled entities). If either the relinquished or replacement property is disposed of within 2 years, gain or loss that was not recognized on the original exchange must be recognized on the date the like-kind property is disposed of by either the taxpayer or the related party.

Exceptions to recognition apply if:

  • neither the original exchange or the disposition had as one of the principal purposes avoidance of tax;
  • the disposition was due to the death of either related party; or
  • the disposition was to to the compulsory or involuntary conversion of the property.

Replacement property basis

The basis of the replacement property is the adjusted basis of the relinquished property plus any additional cash used to acquire the replacement property.


Distinguished from like-kind treatment, no gain of loss is recognized when business equipment is traded in as part payment for new equipment. The trade is part of the same transaction and e.g., shows as part of the purchase invoice.