Section 1031 allows nonrecognition of gain when a taxpayer exchanges real property held for business or investment for other real property of like‑kind. Since 2018, only real property qualifies. Personal property no longer qualifies.
What Qualifies as Like‑Kind
Real property is like‑kind to other real property if both are:
- Held for investment or
- Held for productive use in a trade or business
Examples of like‑kind real estate:
- Apartment building ↔ retail building
- City lot ↔ farmland
- Improved land ↔ unimproved land
- Rental house ↔ vacant land
- Real estate ↔ 30‑year leasehold interest
Not like‑kind:
- U.S. real property ↔ foreign real property
- Improvements without land
- Property held primarily for sale
- Personal residences or vacation homes
- Stocks, bonds, partnership interests, notes, beneficial interests
Timing Rules
A valid deferred exchange must meet:
- 45‑day identification period
- 180‑day exchange period (or tax return due date with extensions, whichever is earlier)
Both properties must be held for business or investment.
Gain Recognition
General rule: No gain or loss recognized on exchange of like‑kind real property.
Realized gain = Amount realized − adjusted basis
Amount realized includes:
- Cash received
- FMV of property received
- Liabilities assumed by the other party
- Minus exchange expenses
Boot
Boot = money, other (unlike) property, or net liabilities assumed by the other party.
Recognized gain = lesser of:
- Realized gain
- Boot received (minus exchange expenses)
Losses are never recognized on like‑kind exchanges.
If the taxpayer gives up unlike property, gain or loss on that property is recognized.
Exchange Expenses
Exchange expenses (commissions, attorney fees, deed prep) reduce:
- Boot received, and
- Increase the basis of replacement property
Liabilities
- Liabilities assumed by the other party increase amount realized
- Liabilities assumed by the taxpayer reduce amount realized
Net liability relief is treated as boot received.
Basis of Replacement Property
Basis of replacement property = Basis of property given up
- boot paid
- liabilities assumed
- exchange expenses
- recognized gain − boot received − liabilities assumed by the other party − recognized loss
If multiple properties are received, allocate basis by FMV proportion.
Related‑Party Exchanges
If either party disposes of the property within 2 years, previously unrecognized gain becomes taxable.
Losses are not deductible in related‑party transactions involving:
- Family members (spouse, siblings, parents, grandparents, children, grandchildren)
- Entities >50% owned by the taxpayer
- Controlled tax‑exempt organizations