Section 1031
From Wikicpa
Section 1031 of the Internal Revenue Code allows that that the sale or exchange of certain types of property will not result in the recognition of gain or loss. However, taxpayers must be cautious in the fact that while 1031 like-kind exchanges are beneficial in that sense that it allows realized gain to go unrecognized, it can also be detrimental to the taxpayer in the fact that it forces realized losses to be nondeductible. However there are some criteria that need to be met for to structure sale as like-kind.
First, the properties exchanged must be used in a taxpayers trade or business or investment. Secondly, the property must be solely for like kind property that is real property for real property or personal property for personal property. Some issues taxpayers may face regarding this concept is whether items such as equipment used on the property are included in the lump sum sale of the property and if they are able to be deferred. Under treasury regulation §1.1031(k)-1(c)(5)(i), property that is transferred together with the larger item of value will not exceed 15% of the fair market value of the larger property. For example, if equipment with a fair market value of $15,000 dollars, as long as the qualified like kind property is selling for greater then $100,000 dollars then the qualified 1031 property, the equipment can be included in the exchange of property and any gain realized can be deferred.
Another issue regards what happens when a taxpayer receives cash payments to equalize the transaction. Cash paid cannot be deferred under Code Section 1031 because it is not property. The cash received is known as boot and is treated at a normal capital gains rate.
There are certain paperwork requirements that need to be in order for the election of 1031. Originally, 1031 cases needed to be simultaneous transfers of ownership to qualify for 1031. However, according to Starker vs. U.S. (602 F.2d 1341), a contract to exchange properties in the future is practically the same as a simultaneous transfer. It is under this case that the rules for election of a delayed 1031 originated. According to code section 1031, to elect the 1031 recognition, a taxpayer must fulfill the requirement that property and that they be identified prior to the exchange and that exchange be completed not more than 180 days after transfer of exchanged property. If the transaction is not complete within 180 days, the taxpayer forfeits the 1031 deferment elections.
Section 1031 Like Kind Exchanges
An exchange is a taxable event as it gives rise to a realized gain (loss) to the extent the fair market value of the property received differs from the tax basis of the property given up.
Section 1031 (a) of the Internal Revenue Code states the recognition rules for realized gains (or losses) which come about as a result of an exchange of like kind property held for productive use in trade or business or for investment. It states that none of the realized gain or loss will be recognized. However, it also states that losses are non-deductible. This is a mandatory provision if the conditions are met.
1031 (b) states the rules when like kind property and boot are received in an exchange situation. Boot is defined as cash or non-qualifying property. In this situation, the gain is recognized to the extent of “boot” received.
1031 (c) covers cases where the situation is the same as in 1031 (b) except that the transaction results in a loss. In this situation, the loss is not recognized at the time of the transaction. Rather, the realized loss must be carried forward in the form of a higher basis on the property received.
1031 (d) defines the basis calculation for property acquired during a like kind exchange. It states that the basis of the newl property is the same as the basis of the property given up decreased in the amount of any money received by the taxpayer and increased by the amount of gain recognized on the transaction (decreased by the amount of the loss recognized) by the taxpayer. If the transaction falls under 1031 (b) or (c), the basis calculated in 1031 (d) shall be allocated between the properties received (other than money) and for purposes of allocation, there shall be assigned to such other property an amount equivalent to its Fair Market Value at the date of the exchange.
1031 (e) stipulates that livestock of different sexes do not qualify for like kind exchange.
