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IRS.gov Website
Publication 544
taxmap/pubs/p544-005.htm#en_us_publink100072370

Nontaxable Exchanges(p11)

rule
Certain 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_publink100072371

Like-Kind Exchanges(p11)

rule
The 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. 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_publink100072372

Multiple-party transactions.(p11)

rule
The 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_publink100072373
Receipt of title from third party.(p11)
If 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_publink100072374

Basis of property received.(p11)

rule
If 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.
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Example.(p11)

You 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).
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Money paid.(p11)

rule
If, 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.
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Example.(p11)

Bill 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_publink100072378

Sale and purchase.(p11)

rule
If 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_publink100072379

Example.(p11)

You 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.
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Reporting the exchange.(p11)

rule
Report 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.
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Exchange expenses.(p11)

rule
Exchange 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_publink100072382

Qualifying Property(p11)

rule
In 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. 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.
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Like-Kind Property(p12)

rule
There 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.
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Real property.(p12)

rule
An 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_publink100072385
Foreign real property exchanges.(p12)
Real 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.
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Personal property.(p12)

rule
Depreciable 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_publink100072387
General Asset Classes.(p12)
General Asset Classes describe the types of property frequently used in many businesses. They include the following property.
  1. Office furniture, fixtures, and equipment (asset class 00.11).
  2. Information systems, such as computers and peripheral equipment (asset class 00.12).
  3. Data handling equipment except computers (asset class 00.13).
  4. 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).
  5. Automobiles and taxis (asset class 00.22).
  6. Buses (asset class 00.23).
  7. Light general purpose trucks (asset class 00.241).
  8. Heavy general purpose trucks (asset class 00.242).
  9. Railroad cars and locomotives except those owned by railroad transportation companies (asset class 00.25).
  10. Tractor units for use over the road (asset class 00.26).
  11. Trailers and trailer-mounted containers (asset class 00.27).
  12. Vessels, barges, tugs, and similar water-transportation equipment, except those used in marine construction (asset class 00.28).
  13. Industrial steam and electric generation or distribution systems (asset class 00.4).
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Product Classes.(p12)
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).
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Example 1.(p12)

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.
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Example 2.(p12)

Trena 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_publink100072391
Intangible personal property and nondepreciable personal property.(p12)
If 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.
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Example.(p12)

The 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_publink100072393
Goodwill and going concern.(p12)
The 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.
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Foreign personal property exchanges.(p12)
Personal 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_publink100072395
Predominant use.(p12)
You 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.
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Deferred Exchange(p13)

rule
A 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_publink1000145593

Actual and constructive receipt.(p13)

rule
For 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.
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Identification requirement.(p13)

rule
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.
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Identifying replacement property.(p13)
You 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_publink100072399
Identifying alternative and multiple properties.(p13)
You 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:
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:
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Disregard incidental property.(p13)
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.
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Replacement property to be produced.(p13)
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.
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Receipt requirement.(p13)

rule
The property must be received by the earlier of the following dates. This period of time is called the exchange period. You must receive substantially the same property that met the identification requirement, discussed earlier.
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Replacement property produced after identification.(p13)
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

Interest income.(p13)

rule
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 .
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Disqualified persons.(p14)

rule
A disqualified person is a person who is any of the following.
  1. Your agent at the time of the transaction.
  2. A person who is related to you under the rules discussed in chapter 2 under Nondeductible loss, substituting "10%" for "50%."
  3. 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.
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.
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Safe Harbors Against Actual and Constructive Receipt in Deferred Exchanges(p14)

rule
The following arrangements will not result in actual or constructive receipt of money or unlike property in a deferred exchange.
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Security or guarantee arrangements.(p14)

rule
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.
  1. A mortgage, deed of trust, or other security interest in property (other than in cash or a cash equivalent)
  2. A standby letter of credit that satisfies all the following requirements:
    1. Not negotiable, whether by the terms of the letter of credit or under applicable local law,
    2. 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,
    3. Issued by a bank or other financial institution,
    4. Serves as a guarantee of the evidence of indebtedness which is secured by the letter of credit, and
    5. May not be drawn on in the absence of a default in the transferee's obligation to transfer the replacement property to you.
  3. 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.
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Qualified escrow account or qualified trust.(p14)

rule
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 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.
A trust is a qualified trust if both of the following conditions are met.
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.
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Qualified intermediary.(p14)

rule
If 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:
For determining whether an intermediary acquires and transfers property, the following rules apply.
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_publink1000245880
Safe harbor method for reporting gain or loss when qualified intermediary defaults.(p15)
Generally, 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.
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Multiple-party transactions involving related persons.(p15)
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.)
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Interest or growth factors.(p15)

rule
You 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.
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Additional restrictions on safe harbors.(p15)

rule
In 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.
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Like-Kind Exchanges Using Qualified Exchange Accommodation Arrangements (QEAAs)(p15)

rule
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.
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Requirements for a QEAA.(p15)

rule
Property is held in a QEAA only if all the following requirements are met.
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Written agreement.(p15)

rule
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.
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_publink100072409
Bona fide intent.(p15)
When 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_publink100072410

Time limits for identifying and transferring property.(p15)

rule
Under a QEAA, the following time limits for identifying and transferring the property must be met.
  1. 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.
  2. 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.
    1. The replacement property is transferred to you (either directly or indirectly through a qualified intermediary, defined earlier under Qualified intermediary).
    2. The relinquished property is transferred to a person other than you or a disqualified person. A disqualified person is either of the following.
      1. 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.
      2. A person who is related to you or your agent under the rules discussed in chapter 2 under Nondeductible Loss, substituting "10%" for "50%."
  3. The combined time period the relinquished property and replacement property are held in the QEAA cannot be longer than 180 days.
taxmap/pubs/p544-005.htm#en_us_publink100072411

Exchange accommodation titleholder (EAT).(p16)

rule
The EAT must meet all the following requirements.
taxmap/pubs/p544-005.htm#en_us_publink100072412
Qualified indications of ownership.(p16)
Qualified indications of ownership are any of the following.
taxmap/pubs/p544-005.htm#en_us_publink100072413

Other permissible arrangements.(p16)

rule
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_publink100072414

Partially Nontaxable Exchanges(p16)

rule
If, 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_publink100072417

Example.(p16)

You 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
Cash1,000
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_publink100072418

Assumption of liabilities.(p16)

rule
For 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_publink100072419

Example.(p16)

The 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
Cash1,000
Mortgage assumed by other party3,000
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_publink1000147848

Example.(p16)

The 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
Cash1,000
Mortgage assumed by other party3,000
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_publink100072420

Unlike property given up.(p16)

rule
If, 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_publink100072421

Example.(p16)

You 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_publink100072422

Basis of property received.(p16)

rule
The 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.
  1. Add both the following amounts.
    1. Any additional costs you incur.
    2. Any gain you recognize on the exchange.
  2. Subtract both the following amounts.
    1. Any money you receive.
    2. 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.
taxmap/pubs/p544-005.htm#en_us_publink100072423

Multiple Property Exchanges(p17)

rule
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. In these situations, you figure your recognized gain and the basis of the property you receive by comparing the properties within each exchange group.
taxmap/pubs/p544-005.htm#en_us_publink100072424

Exchange groups.(p17)

rule
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.
taxmap/pubs/p544-005.htm#en_us_publink100072425

Example.(p17)

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_publink100072426
Treatment of liabilities.(p17)
Offset 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_publink100072427

Example.(p17)

The 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 A2,500500
Truck A2,000-0-
Ben Receives:  
Computer R$1,600$ -0-
Automobile R3,100750
Truck R1,400250
Cash400 
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. 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.
taxmap/pubs/p544-005.htm#en_us_publink100072428

Residual group.(p17)

rule
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. 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.
  1. 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.
  2. Certificates of deposit, U.S. Government securities, foreign currency, and actively traded personal property, including stock and securities.
  3. 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.
  4. 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.
  5. Assets other than those listed in (1), (2), (3), (4), (6), and (7).
  6. All section 197 intangibles except goodwill and going concern value.
  7. 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).
taxmap/pubs/p544-005.htm#en_us_publink100072429

Example.(p18)

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 A4,000
Fran Receives: 
Automobile B$2,950
Printer B800
Corporate Stock750
Cash500
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.
taxmap/pubs/p544-005.htm#en_us_publink100072430

Exchange group surplus and deficiency.(p18)

rule
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_publink100072431

Example.(p18)

Karen 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 A3751,000
Karen Receives:  
Printer B$2,050
Automobile B2,950
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_publink100072432

Recognized gain.(p18)

rule
Gain 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_publink100072433

Example.(p18)

Based 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_publink100072434

Basis of properties received.(p18)

rule
The total basis of properties received in each exchange group is the sum of the following amounts.
  1. The total adjusted basis of the transferred properties within that exchange group.
  2. Your recognized gain on the exchange group.
  3. The excess liabilities you assume that are allocated to the group.
  4. 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_publink100072435

Example.(p18)

Based 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.
  1. Adjusted basis of the property transferred within that exchange group ($375).
  2. Gain recognized for that exchange group ($-0-).
  3. Excess liabilities assumed allocated to that exchange group ($-0-).
  4. 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.
  1. Adjusted basis of the property transferred within that exchange group ($1,500).
  2. Gain recognized for that exchange group ($1,050).
  3. Excess liabilities assumed allocated to that exchange group ($-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_publink100072436

Like-Kind Exchanges  
Between Related Persons(p18)

rule
Special 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_publink100072437

Related persons.(p18)

rule
Under 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.
EIC
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_publink100072439

Example.(p18)

You 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_publink100072440

Two-year holding period.(p19)

rule
The 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.
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_publink100072441

Exceptions to the rules for related persons.(p19)

rule
The following kinds of property dispositions are excluded from these rules.
taxmap/pubs/p544-005.htm#en_us_publink100072442

Other Nontaxable Exchanges(p19)

rule
The following discussions describe other exchanges that may not be taxable.
taxmap/pubs/p544-005.htm#en_us_publink100072443

Partnership Interests(p19)

rule
Exchanges 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_publink100072444

U.S. Treasury Notes or Bonds(p19)

rule
Certain 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_publink100072447

Insurance Policies and Annuities(p19)

rule
No 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.
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_publink100072448

Cash received.(p19)

rule
The 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.
  1. 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.
  2. You withdraw all amounts to which you are entitled or, if less, the maximum permitted under the state proceeding.
  3. 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.
  4. 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.
  5. 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.
  1. Give to the issuer of the new policy or contract a statement that includes all the following information.
    1. The gross amount of cash distributed.
    2. The amount reinvested.
    3. Your investment in the affected policy or contract on the date of the initial cash distribution.
  2. Attach the following items to your timely filed tax return for the year of the initial distribution.
    1. 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.
    2. A copy of the statement given to the issuer of the new policy or contract.
taxmap/pubs/p544-005.htm#en_us_publink100072449

Property Exchanged for Stock(p19)

rule
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.
taxmap/pubs/p544-005.htm#en_us_publink100072450

Control of a corporation.(p20)

rule
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.
Deposit
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_publink100072452

Example 1.(p20)

You 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_publink100072453

Example 2.(p20)

You 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_publink100072454

Services rendered.(p20)

rule
The 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.
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Example.(p20)

You 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.
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Property of relatively small value.(p20)

rule
The 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.
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Stock received in disproportion to property transferred.(p20)

rule
If 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.
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Money or other property received.(p20)

rule
If, 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.
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Nonqualified preferred stock.(p20)
Nonqualified preferred stock is treated as property other than stock. Generally, it is preferred stock with any of the following features. For a detailed definition of nonqualified preferred stock, see section 351(g)(2) of the Internal Revenue Code.
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Liabilities.(p20)
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. For more information on the assumption of liabilities, see section 357(d) of the Internal Revenue Code.
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Example.(p20)

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 received10,000
Liability assumed by corporation5,000
Total received$31,000
Minus: Adjusted basis of property transferred20,000
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.