Section 1031 Exchange
The Section 1031 exchange is the most important type of Tax-deferred Exchange for investors and a valuable tax-saving technique for business owners. The term is sometimes shortened to “1031 exchange.”1
Under this rule, if you “exchange” property of a like kind, you do not report any gain or loss on the exchange. Because the term “like-kind” is the key requirement, this technique is also called a Like-kind Exchange. (So Section 1031 exchange, 1031 exchange, and like-kind exchange all mean the same thing.)
Exchange means buy and sell. Although the tax code uses the term “exchange,” IRS regulations and court cases allow you to sell property and buy replacement property but still enjoy tax-deferred “exchange” treatment. You do this by using a kind of escrow agent, who may be called a Section 1031 exchange facilitator, a qualified intermediary, or an exchange accommodation titleholder.2
In essence, you do the buying and selling but the intermediary handles the money and the paperwork so that you are never technically the “seller” of your old property or the “buyer” of the new property.
The term Like-kind Property is defined broadly. For example:
You can exchange business property for investment property and vice versa.3
Unimproved real estate and improved real estate are like-kind.4
Cars, light-duty trucks, crossover vehicles, sports utility vehicles (SUVs), minivans, and cargo vans are all like-kind.5
If, as part of the exchange, you also receive Boot, i.e., cash or other property that is not of like kind, you recognize gain to the extent of the cash and the fair market value of the other property you received.6 However, receiving boot will not allow you to recognize a tax loss.7
Your Basis in the property you receive in a Section 1031 exchange is the same as your basis in the property you gave up, increased by any cash you paid or gain you recognized, and decreased by any cash you received.8
1 The technique is specifically authorized by IRC Section 1031.
2 Reg. Section 1.1031(b)-2 (safe harbor for qualified intermediaries in simultaneous exchanges); Reg. Section 1.1031(k)-1 (deferred exchanges); Rev. Proc. 2000-37, 2000-2 C.B. 308, as modified by Rev. Proc. 2004-51, 2004-33 I.R.B. 294 (reverse exchanges).
3 Reg. 1.1031(a)-1(a).
4 Reg. 1.1031(a)-1(b).
5 IRS Private Letter Ruling 200912004.
6 IRC Section 1031(b).
7 IRC Section 1031(c).
8 IRC Section 1031(d); Reg. Section 1.1031(a), (b).