Like-Kind Exchange (Section 1031)
A like-kind exchange under IRC Section 1031 allows taxpayers to defer capital gains tax by exchanging qualifying real property held for business or investment purposes for similar property. The replacement property must be identified within 45 days and the exchange completed within 180 days. Personal property no longer qualifies after the Tax Cuts and Jobs Act (2017).
Exam Tip
1031 = real property only (post-TCJA). 45-day identification + 180-day closing. Boot = taxable. Deferred gain reduces basis of replacement. Cannot exchange with related parties (2-year rule).
What is a Like-Kind Exchange?
Section 1031 allows deferral of gain on the exchange of qualifying real property held for business or investment. The gain is deferred, not eliminated -- basis carries over to the replacement property.
Key Deadlines
| Deadline | Requirement |
|---|---|
| 45-day identification | Must identify replacement property in writing |
| 180-day exchange | Must close on replacement property |
| Both run concurrently | 180 days starts from transfer of relinquished property |
Identification Rules
| Rule | Details |
|---|---|
| 3-property rule | Identify up to 3 properties regardless of value |
| 200% rule | Identify any number if total FMV doesn't exceed 200% of relinquished |
| 95% rule | Identify any number if you acquire 95%+ of identified value |
What Qualifies (Post-TCJA)
| Qualifies | Does NOT Qualify |
|---|---|
| Real property held for business | Personal property (vehicles, equipment) |
| Real property held for investment | Primary residence |
| Improved or unimproved land | Stock, bonds, inventory |
| Domestic real property only | Foreign real property |
Exam Alert
Post-TCJA: ONLY real property qualifies for 1031. 45-day identification + 180-day closing. Boot received = taxable gain (up to lesser of boot or gain). Basis of replacement = basis of relinquished - boot given + boot received + gain recognized. Cannot exchange with related parties if either disposes within 2 years.
Study This Term In
Related Terms
Boot (Tax)
Boot is the taxable portion received in an otherwise tax-free exchange, such as a like-kind exchange under Section 1031. Boot includes cash, debt relief, or non-qualifying property received, and triggers gain recognition up to the amount of boot received.
Basis (Tax Basis)
Basis is the cost or adjusted value of an asset used to determine gain or loss on sale or disposition. Original cost basis includes purchase price plus improvements minus depreciation. Gift basis equals the donor's basis (carryover), while inherited property receives a stepped-up basis to fair market value at death.
Capital Gains Tax
Capital gains tax is a tax on the profit from selling investments or assets. Short-term gains (assets held less than 1 year) are taxed as ordinary income; long-term gains (held more than 1 year) receive preferential rates of 0%, 15%, or 20% based on income.
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