Question

investors often use the like-kind exchange provisions in the tax code to defer recognition of gains when they want to dispose of an asset. These are complicated transactions which has lead to a small industry being created just to meet the requirements of the provisions. Unfortunately, there are two requirements of like-kind exchanges which are often messed up. If messed up, these result in nullifying all or part of the exchange benefit. (a) What are the requirements for like-kind exchange treatment for real property? For personal property? (b) Of those requirements, which do you believe would be the two which are most often messed up, thereby nullifying all or part of the gain deferral?

Answer 1

Requirement (a):

Like-kind exchange requirements are as following in respect of real property:

1. The property acquired must be similar as the one which has been relinquished. Thus, the characteristics of the property exchanged must be similar in nature.
2. In case of non-qualifying property then the benefit of like-kind exchanges either will be partially or completely withdrawn.
3. The transaction must be of an actual exchange thus, sale transaction is not within the scope of like-kind exchange.
4. The specified time requirements must be complied by the tax payer.

  Like-kind exchange requirements are as following in respect of personal property:

1. Individuals, small business, institutional tax payers are allowed to avail the benefit of like-kind exchanges for exchange of personal property.
2. The personal property must be used for qualified purposes only this, in case of non-qualified use of the personal property then the benefit of like-kind exchange will not be available.
3. Both tangible and intangible personal property are allowed under section 1031 for like-kind exchange.

Requirement (b):

Out of the above requirements the following are the two requirement which are often messed up. In case of such mess up will result in nullification of all or part of the gain deferral;

1. The characteristics of the properties must be similar in nature in case of real property is often messed up.
2. Qualified and non-qualified assets are also often messed up by the tax payers both in case of real as well as personal property.