Federal Tax

Taxfree Exchanges Under Section 1031 (Portfolio 567)

  • The Portfolio, Taxfree Exchanges Under Section 1031, analyzes the nontaxable exchange provisions of §1031 of the Internal Revenue Code.


Bloomberg Tax Portfolio, Taxfree Exchanges Under Section 1031, analyzes the nontaxable exchange provisions of §1031 of the Internal Revenue Code. The Portfolio’s analysis of §1031 includes a discussion of the types of property that do and do not qualify for nonrecognition treatment; the concepts of “like-kind,” “boot” and “exchange”; the deferred exchange rules; the rules relating to the allocation of boot; and the determination of the basis and holding period of properties received in such exchanges. The Portfolio also discusses the problems involved in sale and leaseback transactions, multi-party exchanges, multi-asset exchanges, and reverse exchanges.

Section 1031 provides that the exchange of certain types of property will not result in the recognition of gain or loss. The property exchanged and received in the transaction must be of like kind and must be held either for investment or for productive use in the taxpayer’s trade or business; however, such property does not include stock in trade or other property held primarily for sale, partnership interests, stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, and other securities or evidences of indebtedness or interest.

Gain is recognized in a transaction which otherwise qualifies under §1031 if, in addition to nonrecognition property, the taxpayer receives other property, so-called “boot.” Losses, as a general rule, are not recognized in a transaction that qualifies under §1031. However, if the taxpayer surrenders boot in addition to qualifying property, gain or loss is recognized on the boot surrendered. Although a liability of the transferor assumed by the transferee is deemed boot to the transferor, the regulations permit netting of boot given by the transferor against such a liability.

Section 1031 establishes certain basis rules: in general, the property received acquires the basis (and holding period) of the properties surrendered, (i) reduced by any money received or liabilities assumed by the transferee to the exchange, and by any loss recognized to the transferor, and (ii) increased by the amount of gain recognized to the transferor. The basis as thus computed is allocated first to the “boot” property received to the extent of fair market value, and the remaining basis is allocated among the nonrecognition properties received, apparently in proportion to relative fair market values as of the date of the exchange.

Table of Contents

I. Introduction
II. Statutory Requirements
III. Excluded Property
IV. Special Problems Relating to Partnerships and Co-Ownerships
V. Multi-Party Exchanges
VI. Delayed (Forward) Exchanges
VII. Reverse Exchanges
VIII. Sale-Leaseback Transaction
IX. Boot
X. Basis
XI. Holding Periods
XII. Disregarded Entities
XIII. Depreciation Recapture
XIV. Relation to Other Code Sections
XV. Reporting Requirements
XVI. State Taxation of Like-Kind Exchanges

Howard Levine
Roberts and Holland LLP