LIKE KIND EXCHANGE ("1031 EXCHANGE")

Persons who are considering selling their investment property and acquiring similar investment property may be able to qualify for a deferral of the tax on the gain which would otherwise be recognized on the sale.

Section 1031 of the Internal Revenue Code 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. The rationale for nonrecognition of gain or loss is that a tax should not be imposed on a theoretical gain where a taxpayer continues his investment in like-kind property.

The following property does not qualify for a like kind exchange: stock in trade or other property held primarily for sale, stocks, bonds, or notes, other securities or evidences of indebtedness or interest, interests in a partnership, certificates of trust or beneficial interests, or choses in action.

Gain is recognized in a Section 1031 transaction if, in addition to receiving qualified property, the taxpayer receives non-qualified property. This non-qualified property is commonly referred to as "boot". Losses are generally not recognized in a transaction that qualifies under section 1031. In general, the property received will inherit the basis of the property given up with certain adjustments.

The rules require that in order for the transaction to qualify under section 1031, the replacement property must be identified before 45 days and received before 180 days after relinquishing the exchanged property. This assumes that the exchanged property is disposed of prior to receiving the replacement property. However, the Internal Revenue Service has recently advised that a "reverse" exchange will qualify for section 1031 so long as certain safe harbor requirements are satisfied that are set forth in a 2000 Revenue Procedure.

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