Publication 544
taxmap/pubs/p544-005.htm#en_us_publink100072370Certain exchanges of property are not taxable. This means any
gain from the exchange is not recognized, and any loss cannot be deducted. Your
gain or loss will not be recognized until you sell or otherwise dispose of the
property you receive.
taxmap/pubs/p544-005.htm#en_us_publink100072371The exchange of property for the same kind of property is the
most common type of nontaxable exchange. To be a like-kind exchange, the
property traded and the property received must be both of the following.
- Qualifying property.
- Like-kind property.
These two requirements are discussed later.
Additional requirements apply to exchanges in which the property
received is not received immediately upon the transfer of the property given up.
See
Deferred Exchange,
later.
If the like-kind exchange involves the receipt of money or unlike
property or the assumption of your liabilities, you may have to recognize gain.
See
Partially Nontaxable Exchanges,
later.
taxmap/pubs/p544-005.htm#en_us_publink100072372The like-kind exchange rules also apply to property exchanges
that involve three- and four-party transactions. Any part of these
multiple-party transactions can qualify as a like-kind exchange if it meets all
the requirements described in this section.
taxmap/pubs/p544-005.htm#en_us_publink100072373If you receive property in a like-kind exchange and the other
party who transfers the property to you does not give you the title, but a third
party does, you still can treat this transaction as a like-kind exchange if it
meets all the requirements.
taxmap/pubs/p544-005.htm#en_us_publink100072374If you acquire property in a like-kind exchange, the basis of
that property is generally the same as the basis of the property you
transferred.
For the basis of property received in an exchange that is only
partially nontaxable, see
Partially Nontaxable Exchanges,
later.
taxmap/pubs/p544-005.htm#en_us_publink100072375You exchanged real estate held for investment with an adjusted
basis of $25,000 for other real estate held for investment. The basis of your
new property is the same as the basis of the old ($25,000).
taxmap/pubs/p544-005.htm#en_us_publink100072376If, in addition to giving up like-kind property, you pay money
in a like-kind exchange, you still have no recognized gain or loss. The basis of
the property received is the basis of the property given up, increased by the
money paid.
taxmap/pubs/p544-005.htm#en_us_publink100072377Bill Smith trades an old cab for a new one. The new cab costs
$30,000. He is allowed $8,000 for the old cab and pays $22,000 cash. He has no
recognized gain or loss on the transaction regardless of the adjusted basis of
his old cab. If Bill sold the old cab to a third-party for $8,000 and bought a
new one, he would have a recognized gain or loss on the sale of his old cab
equal to the difference between the amount realized and the adjusted basis of
the old cab.
taxmap/pubs/p544-005.htm#en_us_publink100072378If you sell property and buy similar property in two mutually
dependent transactions, you may have to treat the sale and purchase as a single
nontaxable exchange.
taxmap/pubs/p544-005.htm#en_us_publink100072379You used your car in your business for 2 years. Its adjusted
basis is $3,500 and its trade-in value is $4,500. You are interested in a new
car that costs $20,000. Ordinarily, you would trade your old car for the new one
and pay the dealer $15,500. Your basis for depreciation of the new car would
then be $19,000 ($15,500 plus $3,500 adjusted basis of the old car).
You want your new car to have a larger basis for depreciation,
so you arrange to sell your old car to the dealer for $4,500. You then buy the
new one for $20,000 from the same dealer. However, you are treated as having
exchanged your old car for the new one because the sale and purchase are
reciprocal and mutually dependent. Your basis for depreciation for the new car
is $19,000, the same as if you traded the old car.
taxmap/pubs/p544-005.htm#en_us_publink100072380Report the exchange of like-kind property, even though no gain
or loss is recognized, on Form 8824, Like-Kind Exchanges. The instructions for
the form explain how to report the details of the exchange.
If you have any recognized gain because you received money or
unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever
applies. See chapter 4. You may have to report the recognized gain as ordinary
income from depreciation recapture. See
Like-Kind Exchanges and Involuntary Conversions
in chapter 3.
taxmap/pubs/p544-005.htm#en_us_publink100072381Exchange expenses are generally the closing costs you pay. They
include such items as brokerage commissions, attorney fees, and deed preparation
fees. Subtract these expenses from the consideration received to figure the
amount realized on the exchange. Also, add them to the basis of the like-kind
property received. If you receive cash or unlike property in addition to the
like-kind property and realize a gain on the exchange, subtract the expenses
from the cash or fair market value of the unlike property. Then, use the net
amount to figure the recognized gain. See
Partially Nontaxable Exchanges,
later.
taxmap/pubs/p544-005.htm#en_us_publink100072382In a like-kind exchange, both the property you give up and the
property you receive must be held by you for investment or for productive use in
your trade or business. Machinery, buildings, land, trucks, and rental houses
are examples of property that may qualify.
The rules for like-kind exchanges do not apply to exchanges of
the following property.
- Property you use for personal purposes, such as your home
and your family car. However, see below.
- Stock in trade or other property held primarily for sale,
such as inventories, raw materials, and real estate held by dealers.
- Stocks, bonds, notes, or other securities or evidences of
indebtedness, such as accounts receivable.
- Partnership interests.
- Certificates of trust or beneficial interest.
- Choses in action, such as a lawsuit in which you are the plaintiff.
- Certain tax-exempt use property subject to a lease. For more
information, see section 470(e) of the Internal Revenue Code.
However, you may have a nontaxable exchange under other rules.
See
Other Nontaxable Exchanges,
later.
A dwelling unit (home, apartment, condominium, or similar property)
may for purposes of a like-kind exchange as property held for productive use in
a trade or business or for investment purposes if certain requirements are met.
See Rev. Proc. 2008–16. You can find Rev. Proc. 2008–16 on page 547
of Internal Revenue Bulletin 2008–10 at
www.irs.gov/pub/irs-irbs/irb08-10.pdf.
An exchange of the assets of a business for the assets of a similar
business cannot be treated as an exchange of one property for another property.
Whether you engaged in a like-kind exchange depends on an analysis of each asset
involved in the exchange. However, see
Multiple Property Exchanges,
later.
taxmap/pubs/p544-005.htm#en_us_publink100072383There must be an exchange of like-kind property. Like-kind properties
are properties of the same nature or character, even if they differ in grade or
quality. The exchange of real estate for real estate and the exchange of
personal property for similar personal property are exchanges of like-kind
property. For example, the trade of land improved with an apartment house for
land improved with a store building, or a panel truck for a pickup truck, is a
like-kind exchange.
An exchange of personal property for real property does not qualify
as a like-kind exchange. For example, an exchange of a piece of machinery for a
store building does not qualify. Also, the exchange of livestock of different
sexes does not qualify.
taxmap/pubs/p544-005.htm#en_us_publink100072384An exchange of city property for farm property, or improved property
for unimproved property, is a like-kind exchange.
The exchange of real estate you own for a real estate lease that
runs 30 years or longer is a like-kind exchange. However, not all exchanges of
interests in real property qualify. The exchange of a life estate expected to
last less than 30 years for a remainder interest is not a like-kind exchange.
An exchange of a remainder interest in real estate for a remainder
interest in other real estate is a like-kind exchange if the nature or character
of the two property interests is the same.
taxmap/pubs/p544-005.htm#en_us_publink100072385Real property located in the United States and real property
located outside the United States are not considered like-kind property under
the like-kind exchange rules. If you exchange foreign real property for property
located in the United States, your gain or loss on the exchange is recognized.
Foreign real property is real property not located in a state or the District of
Columbia.
This foreign real property exchange rule does not apply to the
replacement of condemned real property. Foreign and U.S. real property can still
be considered like-kind property under the rules for replacing condemned
property to postpone reporting gain on the condemnation. See
Postponement of Gain
under
Involuntary Conversions,
earlier.
taxmap/pubs/p544-005.htm#en_us_publink100072386Depreciable tangible personal property can be either like-kind
or like-class to qualify for nonrecognition treatment. Like-class properties are
depreciable tangible personal properties within the same General Asset Class or
Product Class. Property classified in any General Asset Class may not be
classified within a Product Class.
taxmap/pubs/p544-005.htm#en_us_publink100072387General Asset Classes describe the types of property frequently
used in many businesses. They include the following property.
- Office furniture, fixtures, and equipment (asset class 00.11).
- Information systems, such as computers and peripheral equipment
(asset class 00.12).
- Data handling equipment except computers (asset class 00.13).
- Airplanes (airframes and engines), except planes used in commercial
or contract carrying of passengers or freight, and all helicopters (airframes
and engines) (asset class 00.21).
- Automobiles and taxis (asset class 00.22).
- Buses (asset class 00.23).
- Light general purpose trucks (asset class 00.241).
- Heavy general purpose trucks (asset class 00.242).
- Railroad cars and locomotives except those owned by railroad
transportation companies (asset class 00.25).
- Tractor units for use over the road (asset class 00.26).
- Trailers and trailer-mounted containers (asset class 00.27).
- Vessels, barges, tugs, and similar water-transportation equipment,
except those used in marine construction (asset class 00.28).
- Industrial steam and electric generation or distribution systems
(asset class 00.4).
Product Classes include property listed in a 6-digit product
class (except any ending in 9) in sectors 31 through 33 of the North American
Industry Classification System (NAICS) of the Executive Office of the President,
Office of Management and Budget, United States, 2007 (NAICS Manual). It can be
accessed at
http://www.census.gov/naics. Copies of the hard cover manual may be obtained from the National
Technical Information Service (NTIS) at
http://www.ntis.gov
or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. The cost of the
manual is $29.50 (plus handling) and the order number is PB2007100002 (which
must be typed into the NTIS website search box). A CD-ROM version with search
and retrieval software is also available from NTIS. The cost of the CD-ROM is
$79 (plus handling) and the order number is PB2007500023 (which must be typed
into the NTIS website search box).
You transfer a personal computer used in your business for a
printer to be used in your business. The properties exchanged are within the
same General Asset Class and are of a like-class.
taxmap/pubs/p544-005.htm#en_us_publink100072390Trena transfers a grader to Ron in exchange for a scraper. Both
are used in a business. Neither property is within any of the General Asset
Classes. Both properties, however, are within the same Product Class and are of
a like-class.
taxmap/pubs/p544-005.htm#en_us_publink100072391If you exchange intangible personal property (such as a patent
or a copyright) or nondepreciable personal property (such as property with a
useful life that does not exceed the year you placed it in service), no gain or
loss is recognized on the exchange only if the exchanged properties are of
like-kind. (There are no like-classes for these properties.) Whether intangible
personal property, such as a patent or copyright, is of a like-kind to other
intangible personal property generally depends on the nature or character of the
rights involved. It also depends on the nature or character of the underlying
property to which those rights relate.
taxmap/pubs/p544-005.htm#en_us_publink100072392The exchange of a copyright on a novel for a copyright on a different
novel can qualify as a like-kind exchange. However, the exchange of a copyright
on a novel for a copyright on a song is not a like-kind exchange.
taxmap/pubs/p544-005.htm#en_us_publink100072393The exchange of the goodwill or going concern value of a business
for the goodwill or going concern value of another business is not a like-kind
exchange.
taxmap/pubs/p544-005.htm#en_us_publink100072394Personal property used predominantly in the United States and
personal property used predominantly outside the United States are not like-kind
property under the like-kind exchange rules. If you exchange property used
predominantly in the United States for property used predominantly outside the
United States, your gain or loss on the exchange is recognized.
taxmap/pubs/p544-005.htm#en_us_publink100072395You determine the predominant use of property you gave up based
on where that property was used during the 2-year period ending on the date you
gave it up. You determine the predominant use of the property you acquired based
on where that property was used during the 2-year period beginning on the date
you acquired it.
But if you held either property less than 2 years, determine
its predominant use based on where that property was used only during the period
of time you (or a related person) held it. This does not apply if the exchange
is part of a transaction (or series of transactions) structured to avoid having
to treat property as unlike property under this rule.
However, you must treat property as used predominantly in the
United States if it is used outside the United States, but under section
168(g)(4) of the Internal Revenue Code, is eligible for accelerated depreciation
as though used in the United States.
taxmap/pubs/p544-005.htm#en_us_publink100072396A deferred exchange is an exchange in which you transfer property
you use in business or hold for investment and later receive like-kind property
you will use in business or hold for investment. (The property you receive is
replacement property.) The transaction must be an exchange (that is, property
for property) rather than a transfer of property for money used to buy
replacement property. In addition, the replacement property will not be treated
as like-kind property unless the identification and the receipt requirements
(discussed later) are met.
If, before you receive the replacement property, you actually
or constructively receive money or unlike property in full consideration for the
property you transfer, the transaction will be treated as a sale rather than a
deferred exchange. In that case, you must recognize gain or loss on the
transaction, even if you later receive the replacement property. (It would be
treated as if you bought it.)
If, before you receive the replacement property, you actually
or constructively receive money or unlike property in less than full
consideration for the property you transfer, the transaction will be treated as
a partially taxable exchange. See,
Partially Nontaxable Exchanges, later.
taxmap/pubs/p544-005.htm#en_us_publink1000145593For purposes of a deferred exchange, you actually receive money
or unlike property when you receive the money or unlike property or receive the
economic benefit of the money or unlike property. You constructively receive
money or unlike property when the money or unlike property is credited to your
account, set apart for you, or otherwise made available for you so that you can
draw upon it at any time or so that you can draw upon it if you give notice of
intention to do so. You do not constructively receive money or unlike property
if your control of receiving it is subject to substantial limitations or
restrictions. However, you constructively receive money or unlike property when
the limitations or restrictions lapse, expire, or are waived.
The following rules also apply.
- Whether you actually or constructively receive money or unlike
property is determined without regard to your method of accounting.
- Actual or constructive receipt of money or unlike property
by your agent is actual or constructive receipt by you.
- Whether you actually or constructively receive money or unlike
property is determined without regard to certain arrangements you make to ensure
the other party carries out its obligations to transfer the replacement property
to you. See
Safe Harbors Against Actual and Constructive Receipt in Deferred
Exchanges, later.
You must identify the property to be received within 45 days
after the date you transfer the property given up in the exchange. This period
of time is called the identification period. Any property received during the
identification period is considered to have been identified.
If you transfer more than one property (as part of the same transaction)
and the properties are transferred on different dates, the identification period
and the exchange period begin on the date of the earliest transfer.
taxmap/pubs/p544-005.htm#en_us_publink100072398You must identify the replacement property in a signed written
document and deliver it to the person obligated to transfer the replacement
property or any other person involved in the exchange other than you or a
disqualified person. See
Disqualified persons, later. You must clearly describe the replacement property
in the written document. For example, use the legal description or street
address for real property and the make, model, and year for a car. In the same
manner, you can cancel an identification of replacement property at any time
before the end of the identification period.
taxmap/pubs/p544-005.htm#en_us_publink100072399You can identify more than one replacement property. However,
regardless of the number of properties you give up, the maximum number of
replacement properties you can identify is:
- Three properties regardless of their fair market value; or
- Any number of properties whose total fair market value at
the end of the identification period is not more than double the total fair
market value, on the date of transfer, of all properties you give up.
If, as of the end of the identification period, you have identified
more properties than permitted under this rule, the only property that will be
considered identified is:
- Any replacement property you received before the end of the
identification period, and
- Any replacement property identified before the end of the
identification period and received before the end of the exchange period, but
only if the fair market value of the property is at least 95% of the total fair
market value of all identified replacement properties. Fair market value is
determined on the earlier of the date you received the property or the last day
of the exchange period. See
Receipt requirement, later.
Do not treat property incidental to a larger item of property
as separate from the larger item when you identify replacement property.
Property is incidental if it meets both the following tests.
- It is typically transferred with the larger item.
- The total fair market value of all the incidental property
is not more than 15% of the total fair market value of the larger item of
property.
Gain or loss from a deferred exchange can qualify for nonrecognition
even if the replacement property is not in existence or is being produced at the
time you identify it as replacement property. If you need to know the fair
market value of the replacement property to identify it, estimate its fair
market value as of the date you expect to receive it.
taxmap/pubs/p544-005.htm#en_us_publink100072402The property must be received by the earlier of the following
dates.
- The 180th day after the date on which you transfer the property
given up in the exchange.
- The due date, including extensions, for your tax return for
the tax year in which the transfer of the property given up occurs.
This period of time is called the exchange period. You must
receive substantially the same property that met the identification requirement,
discussed earlier.
In some cases, the replacement property may have been produced
after you identified it (as described earlier in
Replacement property to be produced.) In that case, to determine whether the property you received
was substantially the same property that met the identification requirement, do
not take into account any variations due to usual production changes.
Substantial changes in the property to be produced, however, will disqualify it.
If your replacement property is personal property that had to
be produced, it must be completed by the date you receive it to qualify as
substantially the same property you identified.
If your replacement property is real property that had to be
produced and it is not completed by the date you receive it, it still may
qualify as substantially the same property you identified. It will qualify only
if, had it been completed on time, it would have been considered to be
substantially the same property you identified. It is considered to be
substantially the same only to the extent it is considered real property under
local law. However, any additional production on the replacement property after
you receive it does not qualify as like-kind property. (To this extent, the
transaction is treated as a taxable exchange of property for services.)
taxmap/pubs/p544-005.htm#en_us_publink1000136761
Generally, in a deferred exchange, if the amount of money or property you are
entitled to receive depends upon the length of time between when you transfer
the property given up and when you receive the replacement property, you are
treated as being entitled to receive interest or a growth factor. The interest
or growth factor will be treated as interest, regardless of whether it is paid
in like-kind property, money, or unlike property. Include this interest in your
gross income according to your method of accounting.
If you transferred property after October 7, 2008, in a deferred
exchange and an exchange facilitator holds exchange funds for you and pays you
all the earnings on the exchange funds according to an escrow agreement, trust
agreement, or exchange agreement, you must take into account all items of
income, deduction, and credit attributable to the exchange funds.
If, in accordance with an escrow agreement, trust agreement,
or exchange agreement, an exchange facilitator holds exchange funds for you and
keeps some or all the earnings on the exchange funds in accordance with the
escrow agreement, trust agreement, or exchange agreement, you will be treated as
if you loaned the exchange funds to the exchange facilitator. You must include
in income any interest that you receive and, if the loan is a below-market loan,
you must include in income any imputed interest.
Exchange funds include relinquished property, cash, or cash equivalent
that secures an obligation of a transferee to transfer replacement property, or
proceeds from a transfer of relinquished property, held in a qualified escrow
account, qualified trust, or other escrow account, trust, or fund in a deferred
exchange.
An exchange facilitator is a qualified intermediary, transferee,
escrow holder, trustee, or other person that holds exchange funds for you in a
deferred exchange under the terms of an escrow agreement, trust agreement, or
exchange agreement.
For more information relating to the current taxation of qualified
escrow accounts, qualified trusts, and other escrow accounts, trusts, and funds
used during deferred exchanges of like-kind property, see Regulations sections
1.468B-6 and 1.7872-16. If the exchange facilitator is a qualified intermediary,
also see Rev. Proc. 2010-14, 2010-12 I.R.B. 456, available at
www.irs.gov/irb/2010-12_IRB/ar07.html .
A disqualified person is a person who is any of the following.
- Your agent at the time of the transaction.
- A person who is related to you under the rules discussed in
chapter 2 under
Nondeductible loss, substituting "10%" for "50%."
- A person who is related to a person who is your agent at the
time of the transaction under the rules discussed in chapter 2 under
Nondeductible loss, substituting "10%" for "50%."
For purposes of (1) above, a person who has acted as your employee,
attorney, accountant, investment banker or broker, or real estate agent or
broker within the 2-year period ending on the date of the transfer of the first
of the relinquished properties is your agent at the time of the transaction.
However, solely for purposes of whether a person is a disqualified person as
your agent, the following services for you are not taken into account.
- Services with respect to exchanges of property intended to
qualify for nonrecognition of gain or loss as like-kind exchanges.
- Routine financial, title insurance, escrow, or trust services
by a financial institution, title insurance company, or escrow company.
The rule in (3) above does not apply to a bank or a bank affiliate
if it would otherwise be a disqualified person under the rule in (3) solely
because it is a member of the same controlled group (as determined under section
267(f) of the Internal Revenue Code, substituting "10%" for "50%.") as a person
that has provided investment banking or brokerage services to the taxpayer
within the 2-year period ending on the date of the transfer of the first of the
relinquished properties. For this purpose a bank affiliate is a corporation
whose principal activity is rendering services to facilitate exchanges of
property intended to qualify for nonrecognition of gain under section 1031 and
all of whose stock is owned by either a bank or a bank holding company.
taxmap/pubs/p544-005.htm#en_us_publink100072404The following arrangements will not result in actual or constructive
receipt of money or unlike property in a deferred exchange.
- Security or guarantee arrangements.
- Qualified escrow accounts or qualified trusts.
- Qualified intermediaries.
- Interest or growth factors.
You will not actually or constructively receive money or unlike
property before you actually receive the like-kind replacement property just
because your transferee's obligation to transfer the replacement property to you
is secured or guaranteed by one or more of the following.
- A mortgage, deed of trust, or other security interest in property
(other than in cash or a cash equivalent)
- A standby letter of credit that satisfies all the following
requirements:
- Not negotiable, whether by the terms of the letter of credit
or under applicable local law,
- Not transferable (except together with the evidence of indebtedness
which it secures), whether by the terms of the letter of credit or under
applicable local law,
- Issued by a bank or other financial institution,
- Serves as a guarantee of the evidence of indebtedness which
is secured by the letter of credit, and
- May not be drawn on in the absence of a default in the transferee's
obligation to transfer the replacement property to you.
- A guarantee by a third person.
The protection against actual and constructive receipt ends when
you have an immediate ability or unrestricted right to receive money or unlike
property under the security or guarantee arrangement.
taxmap/pubs/p544-005.htm#en_us_publink1000136587You will not actually or constructively receive money or unlike
property before you actually receive the like-kind replacement property just
because your transferee's obligation is secured by cash or cash equivalent if
the cash or cash equivalent is held in a qualified escrow account or qualified
trust. This rule applies for the amounts held in the qualified escrow account or
qualified trust even if you do receive money or unlike property directly from a
party to the exchange.
An escrow account is a qualified escrow account if both of the
following two conditions are met.
- The escrow holder is neither you nor a disqualified person.
See
Disqualified persons, earlier.
- The escrow agreement expressly limits your rights to receive,
pledge, borrow, or otherwise obtain the benefits of the cash or cash equivalent
held in the escrow account. For more information on how to satisfy this
condition, see
Additional restrictions on safe harbors, later.
A trust is a qualified trust if both of the following conditions
are met.
- The trustee is neither you nor a disqualified person. See
Disqualified persons, earlier. For purposes of whether the trustee of a trust
is a disqualified person, the relationship between you and the trustee created
by the qualified trust will not be considered a relationship between you and a
related person.
- The trust agreement expressly limits your rights to receive,
pledge, borrow, or otherwise obtain the benefits of the cash or cash equivalent
held by the trustee. For more information on how to satisfy this condition, see
Additional restrictions on safe harbors, later.
The protection against actual and constructive receipt ends when
you have an immediate ability or unrestricted right to receive, pledge, borrow,
or otherwise obtain the benefits of the cash or cash equivalent held in the
qualified escrow account or qualified trust.
taxmap/pubs/p544-005.htm#en_us_publink1000136590If you transfer property through a qualified intermediary, the
transfer of the property given up and receipt of like-kind property is treated
as an exchange. This rule applies even if you receive money or unlike property
directly from a party to the transaction other than the qualified intermediary.
A qualified intermediary is a person who is not a disqualified
person (discussed earlier) and who enters into a written exchange agreement with
you and, as required by that agreement:
- Acquires the property you give up,
- Transfers the property you give up,
- Acquires the replacement property, and
- Transfers the replacement property to you.
For determining whether an intermediary acquires and transfers
property, the following rules apply.
- An intermediary is treated as acquiring and transferring property
if the intermediary acquires and transfers legal title to that property.
- An intermediary is treated as acquiring and transferring the
property you give up if the intermediary (either on its own behalf or as the
agent of any party to the transaction) enters into an agreement with a person
other than you for the transfer of that property to that person, and, pursuant
to that agreement, that property is transferred to that person (i.e., by direct deed from you).
- An intermediary is treated as acquiring and transferring replacement
property if the intermediary (either on its own behalf or as the agent of any
party to the transaction) enters into an agreement with the owner of the
replacement property for the transfer of that property and, pursuant to that
agreement, the replacement property is transferred to you (i.e., by direct deed to you).
An intermediary is treated as entering into an agreement if the
rights of a party to the agreement are assigned to the intermediary and all
parties to that agreement are notified in writing of the assignment by the date
of the relevant transfer of property.
The written exchange agreement must expressly limit your rights
to receive, pledge, borrow, or otherwise obtain the benefits of money or unlike
property held by the qualified intermediary.
taxmap/pubs/p544-005.htm#en_us_publink1000245880Generally, if a qualified intermediary is unable to meet its
contractual obligations to you or otherwise causes you not to meet the deadlines
for identifying or receiving replacement property in a deferred or reverse
exchange, your transaction may not qualify as a tax-free deferred exchange. In
that case, any gain may be taxable in the current year.
However, if a qualified intermediary defaults on its obligation
to acquire and transfer replacement property because of bankruptcy or
receivership proceedings, and you meet the requirements of Rev. Proc. 2010-14,
you may be treated as not having actual or constructive receipt of the proceeds
of the exchange in the year of sale of the property you gave up. If you meet the
requirements, you can report the gain in the year or years payments (or debt
relief treated as payments) are received, using the safe harbor gross profit
ratio method. See Rev. Proc. 2010-14, 2010-12 I.R.B. 456, available at
www.irs.gov/irb/2010-12_IRB/ar07.html.
If you transfer property given up to a qualified intermediary
in exchange for replacement property formerly owned by a related person you may
not be entitled to nonrecognition treatment if the related person receives cash
or unlike property for the replacement property. (See
Like-Kind Exchanges Between Related Persons,
later.)
taxmap/pubs/p544-005.htm#en_us_publink1000138938You will not be in actual or constructive receipt of money or
unlike property before you actually receive the like-kind replacement property
just because you are or may be entitled to receive any interest or growth factor
in the deferred exchange. This rule applies only if the agreement under which
you are or may be entitled to the interest or growth factor expressly limits
your rights to receive the interest or growth factor during the exchange period.
See
Additional restrictions on safe harbors, below.
taxmap/pubs/p544-005.htm#en_us_publink1000138939In order to come within the protection of the safe harbors against
actual and constructive receipt of money and unlike property discussed above,
the agreement must provide that you have no rights to receive, pledge, borrow,
or otherwise obtain the benefits of money or unlike property before the end of
the exchange period. However, the agreement can provide you with the following
limited sets of rights.
- If you have not identified replacement property by the end
of the identification period, you can have rights to receive, pledge, borrow, or
otherwise obtain the benefits of the cash or cash equivalent after the end of
the identification period.
- If you have identified replacement property, you can have
rights to receive, pledge, borrow, or otherwise obtain the benefits of the cash
or cash equivalent when or after you receive all the replacement property you
are entitled to receive under the exchange agreement.
- If you have identified replacement property, you can have
rights to receive, pledge, borrow, or otherwise obtain the benefits of the cash
or cash equivalent on the occurrence of a contingency that is related to the
exchange, provided for in writing, and beyond your control or the control of any
disqualified person other than the person obligated to transfer the replacement
property.
The like-kind exchange rules generally do not apply to an exchange
in which you acquire replacement property (new property) before you transfer
relinquished property (property you give up). However, if you use a qualified
exchange accommodation arrangement (QEAA), the transfer may qualify as a
like-kind exchange. For details, see Rev. Proc. 2000-37, 2000–40 I.R.B.
308 as modified by Rev. Proc. 2004-51, 2004-33 I.R.B. 294, available at
www.irs.gov/irb/2004-33_IRB/ar13.html.
Under a QEAA, either the replacement property or the relinquished
property is transferred to an exchange accommodation titleholder (EAT),
discussed later, who is treated as the beneficial owner of the property.
However, for transfers of qualified indications of ownership (defined later),
the replacement property held in a QEAA may not be treated as property received
in an exchange if you previously owned it within 180 days of its transfer to the
EAT. If the property is held in a QEAA, the IRS will accept the qualification of
property as either replacement property or relinquished property and the
treatment of an EAT as the beneficial owner of the property for federal income
tax purposes.
taxmap/pubs/p544-005.htm#en_us_publink100072407Property is held in a QEAA only if all the following requirements
are met.
- You have a written agreement.
- The time limits for identifying and transferring the property
are met.
- The qualified indications of ownership of property are transferred
to an EAT.
Under a QEAA, you and the EAT must enter into a written agreement
no later than 5 business days after the qualified indications of ownership
(discussed later) are transferred to the EAT. The agreement must provide all the
following.
- The EAT is holding the property for your benefit in order
to facilitate an exchange under the like-kind exchange rules and Rev. Proc.
2000-37, as modified by Rev. Proc. 2004-51.
- You and the EAT agree to report the acquisition, holding,
and disposition of the property on your federal income tax returns in a manner
consistent with the agreement.
- The EAT will be treated as the beneficial owner of the property
for all federal income tax purposes.
Property can be treated as being held in a QEAA even if the accounting,
regulatory, or state, local, or foreign tax treatment of the arrangement between
you and the EAT is different from the treatment required by the written
agreement as discussed above.
taxmap/pubs/p544-005.htm#en_us_publink100072409When the qualified indications of ownership of the property are
transferred to the EAT, it must be your bona fide intent that the property held
by the EAT represents either replacement property or relinquished property in an
exchange intended to qualify for nonrecognition of gain (in whole or in part) or
loss under the like-kind exchange rules.
taxmap/pubs/p544-005.htm#en_us_publink100072410Under a QEAA, the following time limits for identifying and transferring
the property must be met.
- No later than 45 days after the transfer of qualified indications
of ownership of the replacement property to the EAT, you must identify the
relinquished property in a manner consistent with the principles for deferred
exchanges. See
Identification requirement
earlier under
Deferred Exchange.
- One of the following transfers must take place no later than
180 days after the transfer of qualified indications of ownership of the
property to the EAT.
- The replacement property is transferred to you (either directly
or indirectly through a qualified intermediary, defined earlier under
Qualified intermediary).
- The relinquished property is transferred to a person other
than you or a disqualified person. A disqualified person is either of the
following.
- Your agent at the time of the transaction. This includes
a person who has been your employee, attorney, accountant, investment banker or
broker, or real estate agent or broker within the 2-year period before the
transfer of the relinquished property.
- A person who is related to you or your agent under the
rules discussed in chapter 2 under
Nondeductible Loss,
substituting "10%" for "50%."
- The combined time period the relinquished property and replacement
property are held in the QEAA cannot be longer than 180 days.
The EAT must meet all the following requirements.
- Hold qualified indications of ownership (defined next) at
all times from the date of acquisition of the property until the property is
transferred (as described in (2), above).
- Be someone other than you or a disqualified person (as defined
in 2(b), above).
- Be subject to federal income tax. If the EAT is treated as
a partnership or S corporation, more than 90% of its interests or stock must be
owned by partners or shareholders who are subject to federal income tax.
Qualified indications of ownership are any of the following.
- Legal title to the property.
- Other indications of ownership of the property that are treated
as beneficial ownership of the property under principles of commercial law (for
example, a contract for deed).
- Interests in an entity that is disregarded as an entity separate
from its owner for federal income tax purposes (for example, a single member
limited liability company) and that holds either legal title to the property or
other indications of ownership.
Property will not fail to be treated as being held in a QEAA
as a result of certain legal or contractual arrangements, regardless of whether
the arrangements contain terms that typically would result from arm's-length
bargaining between unrelated parties for those arrangements. For a list of those
arrangements, see Rev. Proc. 2000-37.
taxmap/pubs/p544-005.htm#en_us_publink100072414If, in addition to like-kind property, you receive money or unlike
property in an exchange of like-kind property on which you realize a gain, you
may have a partially nontaxable exchange. If you realize a gain on the exchange,
you must recognize the gain you realize (see
Amount recognized, earlier) but only to the extent of the money and the fair
market value of the unlike property you receive. If you realize a loss on the
exchange, no loss is recognized. However, see
Unlike property given up, below.
The recognized (taxable) gain on the disposition of the like-kind
property you give up is the smaller of two amounts. The first is the amount of
gain realized. See
Gain or Loss From Sales and Exchanges, earlier. The second is the limit of recognized gain. To figure
the limit on recognized gain, add the money you received and the fair market
value of any unlike property you received. Reduce this amount (but not below
zero) by any exchange expenses (closing costs) you paid. Compare that amount to
your gain realized. Your recognized (taxable) gain is the smaller of the two.
taxmap/pubs/p544-005.htm#en_us_publink100072417You exchange real estate held for investment with an adjusted
basis of $8,000 for other real estate you now hold for investment. The fair
market value (FMV) of the real estate you received was $10,000. You also
received $1,000 in cash. You paid $500 in exchange expenses.
| FMV of like-kind property received | $10,000 |
| Cash | 1,000 |
| Total received | $11,000 |
| Minus: Exchange expenses paid | (500) |
| Amount realized | $10,500 |
| Minus: Adjusted basis of property you transferred | (8,000) |
| Realized gain | $2,500 |
Although the total gain realized on the transaction is $2,500,
the recognized (taxable) gain is only $500, figured as follows.
| Money received (cash) | $1,000 |
| Minus: Exchange expenses paid | (500) |
| Recognized gain | $500 |
taxmap/pubs/p544-005.htm#en_us_publink100072418For purposes of figuring your realized gain, add any liabilities
assumed by the other party to your amount realized. Subtract any liabilities of
the other party that you assume from your amount realized.
For purposes of figuring the limit of recognized gain, if the
other party to a nontaxable exchange assumes any of your liabilities, you will
be treated as if you received money in the amount of the liability. You can
decrease (but not below zero) the amount of money you are treated as receiving
by the amount of the other party's liabilities that you assume and by any cash
you pay, or unlike property you give up. For more information on the assumption
of liabilities, see section 357(d) of the Internal Revenue Code and Regulations
section 1.1031(d)-2.
taxmap/pubs/p544-005.htm#en_us_publink100072419The facts are the same as in the previous example, except the
property you gave up was subject to a $3,000 mortgage for which you were
personally liable. The other party in the trade agreed to pay off the mortgage.
Figure the gain realized as follows.
| FMV of like-kind property received | $10,000 |
| Cash | 1,000 |
| Mortgage assumed by other party | 3,000 |
| Total received | $14,000 |
| Minus: Exchange expenses | (500) |
| Amount realized | $13,500 |
| Minus: Adjusted basis of property you transferred | (8,000) |
| Realized gain | $5,500 |
The realized gain is recognized (taxable) gain only up to $3,500,
figured as follows.
| Money received (cash) | $1,000 |
| Money received (liability assumed by other party) | 3,000 |
| Total money and unlike property received | $4,000 |
| Minus: Exchange expenses paid | (500) |
| Recognized gain | $3,500 |
taxmap/pubs/p544-005.htm#en_us_publink1000147848The facts are the same as in the previous example, except the
property you received had a fair market value (FMV) of $14,000 and was subject
to a $4,000 mortgage that you assumed. Figure the gain realized as follows.
| FMV of like-kind property received | $14,000 |
| Cash | 1,000 |
| Mortgage assumed by other party | 3,000 |
| Total received | $18,000 |
| Minus: Exchange expenses | (500) |
| Amount realized | $17,500 |
| Minus: Adjusted basis of property you transferred | (8,000) |
| Minus: Mortgage you assumed | (4000) |
| Realized gain | $5,500 |
The realized gain is recognized (taxable) gain only up to $500,
figured as follows.
| Money received (cash) | $1,000 |
| Money received (net liabilities assumed by other party): | |
| Mortgage assumed by other party | $3,000 |
| Minus: Mortgage you assumed | (4,000) |
| Total (not below zero) | $0 |
| Total money and unlike property received | $1,000 |
| Minus: Exchange expenses paid | (500) |
| Recognized gain | $500 |
taxmap/pubs/p544-005.htm#en_us_publink100072420If, in addition to like-kind property, you give up unlike property,
you must recognize gain or loss on the unlike property you give up. The gain or
loss is equal to the difference between the fair market value of the unlike
property and the adjusted basis of the unlike property.
taxmap/pubs/p544-005.htm#en_us_publink100072421You exchange stock and real estate you held for investment for
real estate you also intend to hold for investment. The stock you transfer has a
fair market value of $1,000 and an adjusted basis of $4,000. The real estate you
exchange has a fair market value of $19,000 and an adjusted basis of $15,000.
The real estate you receive has a fair market value of $20,000. You do not
recognize gain on the exchange of the real estate because it qualifies as a
nontaxable exchange. However, you must recognize (report on your return) a
$3,000 loss on the stock because it is unlike property.
taxmap/pubs/p544-005.htm#en_us_publink100072422The total basis for all properties (other than money) you receive
in a partially nontaxable exchange is the total adjusted basis of the properties
you give up, with the following adjustments.
- Add both the following amounts.
- Any additional costs you incur.
- Any gain you recognize on the exchange.
- Subtract both the following amounts.
- Any money you receive.
- Any loss you recognize on the exchange.
Allocate this basis first to the unlike property, other than
money, up to its fair market value on the date of the exchange. The rest is the
basis of the like-kind property.
Under the like-kind exchange rules, you generally must make a
property-by-property comparison to figure your recognized gain and the basis of
the property you receive in the exchange. However, for exchanges of multiple
properties, you do not make a property-by-property comparison if you do either
of the following.
- Transfer and receive properties in two or more exchange groups.
- Transfer or receive more than one property within a single
exchange group.
In these situations, you figure your recognized gain and the
basis of the property you receive by comparing the properties within each
exchange group.
Each exchange group consists of properties transferred and received
in the exchange that are of like-kind or like-class. (See
Like-Kind Property,
earlier.) If property could be included in more than one exchange
group, you can include it in any one of those groups. However, the following may
not be included in an exchange group.
- Money.
- Stock in trade or other property held primarily for sale.
- Stocks, bonds, notes, or other securities or evidences of
debt or interest.
- Interests in a partnership.
- Certificates of trust or beneficial interests.
- Choses in action.
Ben exchanges computer A (asset class 00.12), automobile A (asset
class 00.22), and truck A (asset class 00.241) for computer R (asset class
00.12), automobile R (asset class 00.22), truck R (asset class 00.241), and
$400. All properties transferred were used in Ben's business. Similarly, all
properties received will be used in his business.
The first exchange group consists of computers A and R, the second
exchange group consists of automobiles A and R, and the third exchange group
consists of trucks A and R.
taxmap/pubs/p544-005.htm#en_us_publink100072426Offset all liabilities you assume as part of the exchange against
all liabilities of which you are relieved. Offset these liabilities whether they
are recourse or nonrecourse and regardless of whether they are secured by or
otherwise relate to specific property transferred or received as part of the
exchange.
If you assume more liabilities than you are relieved of, allocate
the difference among the exchange groups in proportion to the total fair market
value of the properties you received in the exchange groups. The difference
allocated to each exchange group may not be more than the total fair market
value of the properties you received in the exchange group.
The amount of the liabilities allocated to an exchange group
reduces the total fair market value of the properties received in that exchange
group. This reduction is made in determining whether the exchange group has a
surplus or a deficiency. (See
Exchange group surplus and deficiency,
later.) This reduction is also made in determining whether a
residual group is created. (See
Residual group,
later.)
If you are relieved of more liabilities than you assume, treat
the difference as cash, general deposit accounts (other than certificates of
deposit), and similar items when making allocations to the residual group,
discussed later.
The treatment of liabilities and any differences between amounts
you assume and amounts you are relieved of will be the same even if the
like-kind exchange treatment applies to only part of a larger transaction. If
so, determine the difference in liabilities based on all liabilities you assume
or are relieved of as part of the larger transaction.
taxmap/pubs/p544-005.htm#en_us_publink100072427The facts are the same as in the preceding example. In addition,
the fair market value of and liabilities secured by each property are as
follows.
| | Fair
Market
Value |
Liability |
|---|
| Ben Transfers: | | |
| Computer A | $1,500 | $ -0- |
| Automobile A | 2,500 | 500 |
| Truck A | 2,000 | -0- |
| Ben Receives: | | |
| Computer R | $1,600 | $ -0- |
| Automobile R | 3,100 | 750 |
| Truck R | 1,400 | 250 |
| Cash | 400 | |
All liabilities assumed by Ben ($1,000) are offset by all liabilities
of which he is relieved ($500), resulting in a difference of $500. The
difference is allocated among Ben's exchange groups in proportion to the fair
market value of the properties received in the exchange groups as follows.
- $131 ($500 × $1,600 ÷ $6,100) is allocated to the
first exchange group (computers A and R). The fair market value of computer R is
reduced to $1,469 ($1,600 − $131).
- $254 ($500 × $3,100 ÷ $6,100) is allocated to the
second exchange group (automobiles A and R). The fair market value of automobile
R is reduced to $2,846 ($3,100 − $254).
- $115 ($500 × $1,400 ÷ $6,100) is allocated to the
third exchange group (trucks A and R). The fair market value of truck R is
reduced to $1,285 ($1,400 − $115).
In each exchange group, Ben uses the reduced fair market value
of the properties received to figure the exchange group's surplus or deficiency
and to determine whether a residual group has been created.
A residual group is created if the total fair market value of
the properties transferred in all exchange groups differs from the total fair
market value of the properties received in all exchange groups after taking into
account the treatment of liabilities (discussed earlier). The residual group
consists of money or other property that has a total fair market value equal to
that difference. It consists of either money or other property transferred in
the exchange or money or other property received in the exchange, but not both.
Other property includes the following items.
- Stock in trade or other property held primarily for sale.
- Stocks, bonds, notes, or other securities or evidences of
debt or interest.
- Interests in a partnership.
- Certificates of trust or beneficial interests.
- Choses in action.
Other property also includes property transferred that is not
of a like-kind or like-class with any property received, and property received
that is not of a like-kind or like-class with any property transferred.
Money and properties allocated to the residual group are considered
to come from the following assets in the following order.
- Cash and general deposit accounts (including checking and
savings accounts but excluding certificates of deposit). Also, include here
excess liabilities of which you are relieved over the amount of liabilities you
assume.
- Certificates of deposit, U.S. Government securities, foreign
currency, and actively traded personal property, including stock and securities.
- Accounts receivable, other debt instruments, and assets that
you mark to market at least annually for federal income tax purposes. However,
see section 1.338-6(b)(2)(iii) of the regulations for exceptions that apply to
debt instruments issued by persons related to a target corporation, contingent
debt instruments, and debt instruments convertible into stock or other property.
- Property of a kind that would properly be included in inventory
if on hand at the end of the tax year or property held by the taxpayer primarily
for sale to customers in the ordinary course of business.
- Assets other than those listed in (1), (2), (3), (4), (6),
and (7).
- All section 197 intangibles except goodwill and going concern
value.
- Goodwill and going concern value.
Within each category, you can choose which properties to allocate
to the residual group. If an asset described in any of the categories above,
except (1), is includible in more than one category, include it in the lower
number category. For example, if an asset is described in both (3) and (4),
include it in (3).
Fran exchanges computer A (asset class 00.12) and automobile
A (asset class 00.22) for printer B (asset class 00.12), automobile B (asset
class 00.22), corporate stock, and $500. Fran used computer A and automobile A
in her business and will use printer B and automobile B in her business.
This transaction results in two exchange groups: (1) computer
A and printer B, and (2) automobile A and automobile B.
The fair market values of the properties are as follows.
| | Fair
Market
Value |
|---|
| Fran Transfers: | |
| Computer A | $1,000 |
| Automobile A | 4,000 |
| Fran Receives: | |
| Automobile B | $2,950 |
| Printer B | 800 |
| Corporate Stock | 750 |
| Cash | 500 |
The total fair market value of the properties transferred in
the exchange groups ($5,000) is $1,250 more than the total fair market value of
the properties received in the exchange groups ($3,750), so there is a residual
group in that amount. It consists of the $500 cash and the $750 worth of
corporate stock.
For each exchange group, you must determine whether there is
an "exchange group surplus" or "exchange group deficiency." An exchange group
surplus is the total fair market value of the properties received in an exchange
group (minus any excess liabilities you assume that are allocated to that
exchange group) that is more than the total fair market value of the properties
transferred in that exchange group. An exchange group deficiency is the total
fair market value of the properties transferred in an exchange group that is
more than the total fair market value of the properties received in that
exchange group (minus any excess liabilities you assume that are allocated to
that exchange group).
taxmap/pubs/p544-005.htm#en_us_publink100072431Karen exchanges computer A (asset class 00.12) and automobile
A (asset class 00.22), both of which she used in her business, for printer B
(asset class 00.12) and automobile B (asset class 00.22), both of which she will
use in her business. Karen's adjusted basis and the fair market value of the
exchanged properties are as follows.
| |
Adjusted
Basis | Fair
Market
Value |
|---|
| Karen Transfers: | | |
| Automobile A | $1,500 | $4,000 |
| Computer A | 375 | 1,000 |
| Karen Receives: | | |
| Printer B | $2,050 |
| Automobile B | 2,950 |
The first exchange group consists of computer A and printer
B. It has an exchange group surplus of $1,050 because the fair market value of
printer B ($2,050) is more than the fair market value of computer A ($1,000) by
that amount.
The second exchange group consists of automobile A and automobile
B. It has an exchange group deficiency of $1,050 because the fair market value
of automobile A ($4,000) is more than the fair market value of automobile B
($2,950) by that amount.
taxmap/pubs/p544-005.htm#en_us_publink100072432Gain or loss realized for each exchange group and the residual
group is the difference between the total fair market value of the transferred
properties in that exchange group or residual group and the total adjusted basis
of the properties. For each exchange group, recognized gain is the lesser of the
gain realized or the exchange group deficiency (if any). Losses are not
recognized for an exchange group. The total gain recognized on the exchange of
like-kind or like-class properties is the sum of all the gain recognized for
each exchange group.
For a residual group, you must recognize the entire gain or loss
realized.
For properties you transfer that are not within any exchange
group or the residual group, figure realized and recognized gain or loss as
explained under
Gain or Loss From Sales and Exchanges,
earlier.
taxmap/pubs/p544-005.htm#en_us_publink100072433Based on the facts in the previous example, Karen recognizes
gain on the exchange as follows.
For the first exchange group, the gain realized is the fair market
value of computer A ($1,000) minus its adjusted basis ($375), or $625. The gain
recognized is the lesser of the gain realized, $625, or the exchange group
deficiency, $-0-.
For the second exchange group, the gain realized is the fair
market value of automobile A ($4,000) minus its adjusted basis ($1,500), or
$2,500. The gain recognized is the lesser of the gain realized, $2,500, or the
exchange group deficiency, $1,050.
The total gain recognized by Karen in the exchange is the sum
of the gains recognized with respect to both exchange groups ($-0- + $1,050), or
$1,050.
taxmap/pubs/p544-005.htm#en_us_publink100072434The total basis of properties received in each exchange group
is the sum of the following amounts.
- The total adjusted basis of the transferred properties within
that exchange group.
- Your recognized gain on the exchange group.
- The excess liabilities you assume that are allocated to the
group.
- The exchange group surplus (or minus the exchange group deficiency).
You allocate the total basis of each exchange group proportionately
to each property received in the exchange group according to the property's fair
market value.
The basis of each property received within the residual group
(other than money) is equal to its fair market value.
taxmap/pubs/p544-005.htm#en_us_publink100072435Based on the facts in the two previous examples, the bases of
the properties received by Karen in the exchange, printer B and automobile B,
are determined in the following manner.
The basis of the property received in the first exchange group
is $1,425. This is the sum of the following amounts.
- Adjusted basis of the property transferred within that exchange
group ($375).
- Gain recognized for that exchange group ($-0-).
- Excess liabilities assumed allocated to that exchange group
($-0-).
- Exchange group surplus ($1,050).
Printer B is the only property received within the first exchange
group, so the entire basis of $1,425 is allocated to printer B.
The basis of the property received in the second exchange group
is $1,500. This is figured as follows.
First, add the following amounts.
- Adjusted basis of the property transferred within that exchange
group ($1,500).
- Gain recognized for that exchange group ($1,050).
- Excess liabilities assumed allocated to that exchange group
($-0-).
Then subtract the exchange group deficiency ($1,050).
Automobile B is the only property received within the second
exchange group, so the entire basis ($1,500) is allocated to automobile B.
taxmap/pubs/p544-005.htm#en_us_publink100072436Special rules apply to like-kind exchanges between related persons.
These rules affect both direct and indirect exchanges. Under these rules, if
either person disposes of the property within 2 years after the exchange, the
exchange is disqualified from nonrecognition treatment. The gain or loss on the
original exchange must be recognized as of the date of the later disposition.
taxmap/pubs/p544-005.htm#en_us_publink100072437Under these rules, related persons include, for example, you
and a member of your family (spouse, brother, sister, parent, child, etc.), you
and a corporation in which you have more than 50% ownership, you and a
partnership in which you directly or indirectly own more than a 50% interest of
the capital or profits, and two partnerships in which you directly or indirectly
own more than 50% of the capital interests or profits.
 | An exchange structured to avoid the related party rules is
not a like-kind exchange. See Like-Kind Exchanges Between Related Persons,
earlier. |
For more information on related persons, see
Nondeductible Loss
under
Sales and Exchanges Between Related Persons
in chapter 2.
taxmap/pubs/p544-005.htm#en_us_publink100072439You used a panel truck in your house painting business. Your
sister used a pickup truck in her landscaping business. In December 2009, you
exchanged your panel truck plus $200 for your sister's pickup truck. At that
time, the fair market value (FMV) of your panel truck was $7,000 and its
adjusted basis was $6,000. The fair market value of your sister's pickup truck
was $7,200 and its adjusted basis was $1,000. You realized a gain of $1,000 (the
$7,200 fair market value of the pickup truck minus the $200 you paid minus the
$6,000 adjusted basis of the panel truck). Your sister realized a gain of $6,200
(the $7,000 fair market value of your panel truck plus the $200 you paid minus
the $1,000 adjusted basis of the pickup truck).
However, because this was a like-kind exchange, you recognized
no gain. Your basis in the pickup truck was $6,200 (the $6,000 adjusted basis of
the panel truck plus the $200 you paid). Your sister recognized gain only to the
extent of the money she received, $200. Her basis in the panel truck was $1,000
(the $1,000 adjusted basis of the pickup truck minus the $200 received, plus the
$200 gain recognized).
In 2010, you sold the pickup truck to a third party for $7,000.
You sold it within 2 years after the exchange, so the exchange is disqualified
from nonrecognition treatment. On your 2010 tax return, you must report your
$1,000 gain on the 2009 exchange. You also report a loss on the sale of $200
(the adjusted basis of the pickup truck, $7,200 (its $6,200 basis plus the
$1,000 gain recognized), minus the $7,000 realized from the sale).
In addition, your sister must report on her 2010 tax return the
$6,000 balance of her gain on the 2009 exchange. Her adjusted basis in the panel
truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized).
taxmap/pubs/p544-005.htm#en_us_publink100072440The 2-year holding period begins on the date of the last transfer
of property that was part of the like-kind exchange. If the holder's risk of
loss on the property is substantially diminished during any period, however,
that period is not counted toward the 2-year holding period. The holder's risk
of loss on the property is substantially diminished by any of the following
events.
- The holding of a put on the property.
- The holding by another person of a right to acquire the property.
- A short sale or other transaction.
A put is an option that entitles the holder to sell property
at a specified price at any time before a specified future date.
A short sale involves property you generally do not own. You
borrow the property to deliver to a buyer and, at a later date, buy
substantially identical property and deliver it to the lender.
taxmap/pubs/p544-005.htm#en_us_publink100072441The following kinds of property dispositions are excluded from
these rules.
- Dispositions due to the death of either related person.
- Involuntary conversions.
- Dispositions if it is established to the satisfaction of the
IRS that neither the exchange nor the disposition had as a main purpose the
avoidance of federal income tax.
The following discussions describe other exchanges that may not
be taxable.
taxmap/pubs/p544-005.htm#en_us_publink100072443Exchanges of partnership interests do not qualify as nontaxable
exchanges of like-kind property. This applies regardless of whether they are
general or limited partnership interests or are interests in the same
partnership or different partnerships. However, under certain circumstances the
exchange may be treated as a tax-free contribution of property to a partnership.
See Publication 541, Partnerships.
An interest in a partnership that has a valid election to be
excluded from being treated as a partnership for federal tax purposes is treated
as an interest in each of the partnership assets and not as a partnership
interest. See Publication 541.
taxmap/pubs/p544-005.htm#en_us_publink100072444Certain issues of U.S. Treasury obligations may be exchanged
for certain other issues designated by the Secretary of the Treasury with no
gain or loss recognized on the exchange. See
U.S. Treasury Bills, Notes, and Bonds
under
Interest Income
in Publication 550 for more information on the tax treatment
of income from these investments.
taxmap/pubs/p544-005.htm#en_us_publink100072447No gain or loss is recognized if you make any of the following
exchanges, and if the insured or the annuitant is the same under both contracts.
- A life insurance contract for another life insurance contract,
or for an endowment or annuity contract, or for a qualified long-term care
insurance contract.
- An endowment contract for an annuity contract or for another
endowment contract providing for regular payments beginning at a date not later
than the beginning date under the old contract, or for a qualified long-term
insurance contract.
- One annuity contract for another annuity contract.
- An annuity contract for a qualified long-term care insurance
contract.
- A qualified long-term care insurance contract for another
qualified long-term insurance contract.
- A portion of an annuity contract for a new annuity contract.
If you realize a gain on the exchange of an endowment contract
or annuity contract for a life insurance contract or an exchange of an annuity
contract for an endowment contract, you must recognize the gain.
For information on transfers and rollovers of employer-provided
annuities, see Publication 575, Pension and Annuity Income, or Publication 571,
Tax-Sheltered Annuity Plans (403(b) Plans).
taxmap/pubs/p544-005.htm#en_us_publink100072448The nonrecognition and nontaxable transfer rules do not apply
to a rollover in which you receive cash proceeds from the surrender of one
policy and invest the cash in another policy. However, you can treat a cash
distribution and reinvestment as meeting the nonrecognition or nontaxable
transfer rules if all the following requirements are met.
- When you receive the distribution, the insurance company that
issued the policy or contract is subject to a rehabilitation, conservatorship,
insolvency, or similar state proceeding.
- You withdraw all amounts to which you are entitled or, if
less, the maximum permitted under the state proceeding.
- You reinvest the distribution within 60 days after receipt
in a single policy or contract issued by another insurance company or in a
single custodial account.
- You assign all rights to future distributions to the new issuer
for investment in the new policy or contract if the distribution was restricted
by the state proceeding.
- You would have qualified under the nonrecognition or nontaxable
transfer rules if you had exchanged the affected policy or contract for the new
one.
If you do not reinvest all of the cash distribution, the rules
for partially nontaxable exchanges, discussed earlier, apply.
In addition to meeting these five requirements, you must do both
the following.
- Give to the issuer of the new policy or contract a statement
that includes all the following information.
- The gross amount of cash distributed.
- The amount reinvested.
- Your investment in the affected policy or contract on the
date of the initial cash distribution.
- Attach the following items to your timely filed tax return
for the year of the initial distribution.
- A statement titled "Election under Rev. Proc. 92-44" that
includes the name of the issuer and the policy number (or similar identifying
number) of the new policy or contract.
- A copy of the statement given to the issuer of the new policy
or contract.
If you transfer property to a corporation in exchange for stock
in that corporation (other than nonqualified preferred stock, described later),
and immediately afterward you are in control of the corporation, the exchange is
usually not taxable. This rule applies to transfers by one person and to
transfers by a group. It does not apply in the following situations.
- The corporation is an investment company.
- You transfer the property in a bankruptcy or similar proceeding
in exchange for stock used to pay creditors.
- The stock is received in exchange for the corporation's debt
(other than a security) or for interest on the corporation's debt (including a
security) that accrued while you held the debt.
To be in control of a corporation, you or your group of transferors
must own, immediately after the exchange, at least 80% of the total combined
voting power of all classes of stock entitled to vote and at least 80% of the
total number of shares of all other classes of stock of the corporation.
 | The control requirement can be met even though there are
successive transfers of property and stock. For more information, see Revenue
Ruling 2003-51 in Internal Revenue Bulletin 2003-21. |
taxmap/pubs/p544-005.htm#en_us_publink100072452You and Bill Jones buy property for $100,000. You both organize
a corporation when the property has a fair market value of $300,000. You
transfer the property to the corporation for all its authorized capital stock,
which has a par value of $300,000. No gain is recognized by you, Bill, or the
corporation.
taxmap/pubs/p544-005.htm#en_us_publink100072453You and Bill transfer the property with a basis of $100,000 to
a corporation in exchange for stock with a fair market value of $300,000. This
represents only 75% of each class of stock of the corporation. The other 25% was
already issued to someone else. You and Bill recognize a taxable gain of
$200,000 on the transaction.
taxmap/pubs/p544-005.htm#en_us_publink100072454The term property does not include services rendered or to be
rendered to the issuing corporation. The value of stock received for services is
income to the recipient.
taxmap/pubs/p544-005.htm#en_us_publink100072455You transfer property worth $35,000 and render services valued
at $3,000 to a corporation in exchange for stock valued at $38,000. Right after
the exchange, you own 85% of the outstanding stock. No gain is recognized on the
exchange of property. However, you recognize ordinary income of $3,000 as
payment for services you rendered to the corporation.
taxmap/pubs/p544-005.htm#en_us_publink100072456The term property does not include property of a relatively small
value when it is compared to the value of stock and securities already owned or
to be received for services by the transferor if the main purpose of the
transfer is to qualify for the nonrecognition of gain or loss by other
transferors.
Property transferred will not be considered to be of relatively
small value if its fair market value is at least 10% of the fair market value of
the stock and securities already owned or to be received for services by the
transferor.
taxmap/pubs/p544-005.htm#en_us_publink100072457If a group of transferors exchange property for corporate stock,
each transferor does not have to receive stock in proportion to his or her
interest in the property transferred. If a disproportionate transfer takes
place, it will be treated for tax purposes in accordance with its true nature.
It may be treated as if the stock were first received in proportion and then
some of it used to make gifts, pay compensation for services, or satisfy the
transferor's obligations.
taxmap/pubs/p544-005.htm#en_us_publink100072458If, in an otherwise nontaxable exchange of property for corporate
stock, you also receive money or property other than stock, you may have to
recognize gain. You must recognize gain only up to the amount of money plus the
fair market value of the other property you receive. The rules for figuring the
recognized gain in this situation generally follow those for a partially
nontaxable exchange discussed earlier under
Like-Kind Exchanges.
If the property you give up includes depreciable property, the
recognized gain may have to be reported as ordinary income from depreciation.
See chapter 3.
Note.You cannot recognize or deduct a loss.
taxmap/pubs/p544-005.htm#en_us_publink100072459Nonqualified preferred stock is treated as property other than
stock. Generally, it is preferred stock with any of the following features.
- The holder has the right to require the issuer or a related
person to redeem or buy the stock.
- The issuer or a related person is required to redeem or buy
the stock.
- The issuer or a related person has the right to redeem or
buy the stock and, on the issue date, it is more likely than not that the right
will be exercised.
- The dividend rate on the stock varies with reference to interest
rates, commodity prices, or similar indices.
For a detailed definition of nonqualified preferred stock, see
section 351(g)(2) of the Internal Revenue Code.
If the corporation assumes your liabilities, the exchange generally
is not treated as if you received money or other property. There are two
exceptions to this treatment.
- If the liabilities the corporation assumes are more than your
adjusted basis in the property you transfer, gain is recognized up to the
difference. However, for this purpose, exclude liabilities assumed that give
rise to a deduction when paid, such as a trade account payable or interest.
- If there is no good business reason for the corporation to
assume your liabilities, or if your main purpose in the exchange is to avoid
federal income tax, the assumption is treated as if you received money in the
amount of the liabilities.
For more information on the assumption of liabilities, see section
357(d) of the Internal Revenue Code.
You transfer property to a corporation for stock. Immediately
after the transfer, you control the corporation. You also receive $10,000 in the
exchange. Your adjusted basis in the transferred property is $20,000. The stock
you receive has a fair market value (FMV) of $16,000. The corporation also
assumes a $5,000 mortgage on the property for which you are personally liable.
Gain is realized as follows.
| FMV of stock received | $16,000 |
| Cash received | 10,000 |
| Liability assumed by corporation | 5,000 |
| Total received | $31,000 |
| Minus: Adjusted basis of property transferred | 20,000 |
| Realized gain | $11,000 |
The liability assumed is not treated as money or other property.
The recognized gain is limited to $10,000, the cash received.
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