Question

1.Please explain what requirements must be satisfied in order to receive nontaxable exchange treatment under § 1031
 
2.Please explain the relationship between realized gain and boot received in a § 1031 like-kind exchange
 
3.Please explain the relationship between the postponement of realized gain under § 1031 (like-kind exchanges) and the adjusted basis and holding period for the replacement property
 
4.Please explain under what circumstance is there recognition of some or all of the realized gain associated with the giving of boot by the taxpayer in a like-kind exchange.

Answer 1

1) The following requirements must be satisfied to receive nontaxable exchange treatment under 1031.

·	The form of the transaction is an exchange.
·	Both the property transferred and the property received are held either for productive use in a trade or business or for investment.
·	The property is like-kind property.

2) In a 1031 like-kind exchange, realized gain is the ceiling on the amount of the gain recognized. However, receipt of boot is important and if there is no boot received, no realized gain can be recognized. Whent the fair market value of boot received is less than the realized gain, the gain can be recognized only to the extent of boot received. However, when the fair value of boot received exceeds the realized gain, the gain can be recognized to the extent of realized gain.

3) Postponement of realized gain or loss on like-kind exchanges becomes mendatory due to section 1031. Hence, the holding period becomes a carryover holding period and the basis for the replacement property becomes a carryover basis.

4) Most of the times, in a like-kind exchange, giving of boot by a taxpayer does not stimulate the recognition of realized gain. However, the gain must be recognized, if basis of the boot is less than its fair market value. In such a scenario, the gain must be regognized to the extent of the excess.