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1031 Tax Exchange Rules- The following is an excerpt
that was taken directly from the IRS website.
Office of the Law Revision Counsel, U.S. House of
Representatives
Section 1031 of the Tax Code. Exchange of property held
for a productive use or for an investment
-STATUTE-
(a) Non-recognition of gain or loss is allowed from
exchanges that are solely in like-kind
(1) In general- No gain or loss shall be
recognized on the exchange of property held for the
productive use in a trade or business or for investment
purposes. If such property is exchanged solely for
property of like kind which is to be held either for
productive use in a trade or business or for investment.
(2) Exception-
This subsection shall not apply to any exchange of -
(A) stock in trade or other property held
primarily for sale,
(B) stocks, bonds, or notes,
(C) other securities or indebtedness or
interest,
(D) interests in a partnership,
(E) certificates of trust or beneficial
interests, or
(F) chooses in action.
For purposes of this section, an interest in a
partnership which has in effect a valid election
under section 761(a) to be excluded from the application
of all of subchapter K shall be treated as an interest
in each of the assets of such partnership and not as an
interest in a partnership.
(3) Requirement that property be identified and
that exchange be completed not more than 180 days
after transfer of exchanged property. For
purposes of this subsection, any property received by
the taxpayer shall be treated as property which is not
like-kind property if -
(A) such property is not identified as
property to be received in the exchange on or before the
day which is 45 days after the date on which the
taxpayer transfers the property relinquished in the
exchange, or
(B) such property is received after the
earlier of -
(i) the day which is 180 days after the date
on which the taxpayer transfers the property
relinquished in the exchange, or
(ii) the due date (determined with regard to
extension) for the transferor's return of the tax
imposed by this chapter for the taxable year in which
the transfer of the relinquished property occurs.
(b) Gain from exchanges not solely in kind. If an
exchange would be within the provisions of subsection (a),of
section 1035(a), of section 1036(a), or of section
1037(a), if it were not for the fact that the property
received in exchange consists not only of property
permitted by such provisions to be received without the
recognition of gain, but also of other property or
money, then the gain, if any, to the recipient shall be
recognized, but in an amount not in excess of the sum of
such money and the fair market value of such other
property.
(c) Loss from exchanges not solely in kind. If an
exchange would be within the provisions of subsection
(a),of section 1035(a), of section 1036(a), or of
section 1037(a), if it were not for the fact that the
property received in exchange consists not only of
property permitted by such provisions to be received
without the recognition of gain or loss, but also of
other property or money, then no loss from the exchange
shall be recognized.
(d) Basis- If property was acquired on an exchange
described in this section, section 1035(a), section
1036(a), or section 1037(a), then the basis shall be the
same as that of the property exchanged, decreased in the
amount of any money received by the taxpayer and
increased in the amount of gain or decreased in the
amount of loss to the taxpayer that was recognized on
such exchange. If the property so acquired consisted in
part of the type of property permitted by this section,
section 1035(a), section 1036(a), or section 1037(a), to
be received without the recognition of gain or loss, and
in part of other property, the basis provided in this
subsection shall be allocated between the properties
(other than money) received, and for the purpose of the
allocation there shall be assigned to such other
property an amount equivalent to its fair market value
at the date of the exchange. For purposes of this
section, section 1035(a), and section 1036(a), where as
part of the consideration to the taxpayer another party
to the exchange assumed (as determined under section
357(d)) a liability of the taxpayer, such assumption
shall be considered as money received by the taxpayer on
the exchange.
(e) Exchanges of livestock of different sexes For
purposes of this section, livestock of different sexes
are not property of a like kind.
(f) Special rules for exchanges between related
persons
(1) In general- If -
(A) a taxpayer exchanges property with a
related person
(B) there is non-recognition of gain or loss
to the taxpayer under this section with respect to the
exchange of such property (determined without regard to
this subsection), and
(C) before the date 2 years after the date of
the last transfer which was part of such exchange -
(i) the related person disposes of such
property, or
(ii) the taxpayer disposes of the property
received in the exchange from the related person which
was of like kind to the property transferred by the
taxpayer, there shall be no non-recognition of gain or
loss under this section to the taxpayer with respect to
such exchange; except that any gain or loss recognized
by the taxpayer by reason of this subsection shall be
taken into account as of the date on which the
disposition referred to in subparagraph (C) occurs.
(2) Certain dispositions not taken into account.
For purposes of paragraph (1)(C), there shall not be
taken into account any disposition
(A) after the earlier of the death of the
taxpayer or the death of the related person,
(B) in a compulsory or involuntary conversion
(within the meaning of section 1033) if the exchange
occurred before the threat or imminence of such
conversion, or
(C) with respect to which it is established to
the satisfaction of the Secretary that neither the
exchange nor such disposition had as one of its
principal purposes the avoidance of Federal income tax.
(3) Related person- For purposes of this
subsection, the term "related person" means any person
bearing a relationship to the taxpayer described in
section 267(b) or 707(b)(1).
(4) Treatment of certain transactions. This
section shall not apply to any exchange which is part of
a transaction (or series of transactions) structured to
avoid the purposes of this subsection.
(g) Special rule where substantial diminution of
risk
(1) In general If paragraph (2) applies to any
property for any period, the running of the period set
forth in subsection (f)(1)(C) with respect to such
property shall be suspended during such period.
(2) Property to which subsection applies. This
paragraph shall apply to any property for any period
during which the holder's risk of loss with respect to
the property is substantially diminished by -
(A) the holding of a put with respect to such
property,
(B) the holding by another person of a right
to acquire such property, or
(C) a short sale or any other transaction.
(h) Special rules for foreign real and personal
property
For purposes of this section -
(1) Real property- Real property located in the
United States and real property located outside the
United States are not property of a like kind.
(2) Personal property
(A) In general
Personal property used predominantly within
the United States and personal property used
predominantly outside the United States are not property
of a like kind.
(B) Predominant use- Except as provided in
subparagraph (!1) (C) and (D), the predominant use of
any property shall be determined based on -
(i) in the case of the property relinquished
in the exchange, the 2-year period ending on the date of
such relinquishment, and
(ii) in the case of the property acquired in
the exchange,the 2-year period beginning on the date of
such acquisition.
(C) Property held for less than 2 years Except
in the case of an exchange which is part of a
transaction (or series of transactions) structured to
avoid the purposes of this subsection -
(i) only the periods the property was held
by the person relinquishing the property (or any related
person) shall be taken into account under subparagraph
(B)(i), and
(ii) only the periods the property was held
by the person acquiring the property (or any related
person) shall be taken into account under subparagraph
(B)(ii).
(D) Special rule for certain property. Property
described in any subparagraph of section 168(g)(4) shall
be treated as used predominantly in the United States.
-SOURCE-
(Aug. 16, 1954, ch. 736, 68A Stat. 302; Pub. L.
85-866, title I,
Sec. 44, Sept. 2, 1958, 72 Stat. 1641; Pub. L.
86-346, title II,
Sec. 201(c)-(e), Sept. 22, 1959, 73 Stat. 624; Pub.
L. 91-172,
title II, Sec. 212(c)(1), Dec. 30, 1969, 83 Stat.
571; Pub. L.
98-369, div. A, title I, Sec. 77(a), July 18, 1984,
98 Stat. 595;
Pub. L. 99-514, title XVIII, Sec. 1805(d), Oct. 22,
1986, 100 Stat.
2810; Pub. L. 101-239, title VII, Sec. 7601(a), Dec.
19, 1989, 103
Stat. 2370; Pub. L. 101-508, title XI, Secs.
11701(h), 11703(d)(1),
Nov. 5, 1990, 104 Stat. 1388-508, 1388-517; Pub. L.
105-34, title
X, Sec. 1052(a), Aug. 5, 1997, 111 Stat. 940; Pub.
L. 106-36, title
III, Sec. 3001(c)(2), June 25, 1999, 113 Stat. 183.)
-MISC1-
AMENDMENTS
1999 - Subsec. (d). Pub. L. 106-36, in last
sentence, substituted "assumed (as determined under
section 357(d)) a liability of the taxpayer" for
"assumed a liability of the taxpayer or acquired from
the taxpayer property subject to a liability" and struck
out "or acquisition (in the amount of the liability)"
after "such assumption".
1997 - Subsec. (h). Pub. L. 105-34 amended heading
and text of subsec. (h) generally. Prior to amendment,
text read as follows: "For purposes of this section,
real property located in the United States and real
property located outside the United States are not
property of a like kind."
1990 - Subsec. (a)(2). Pub. L. 101-508, Sec.
11703(d)(1),inserted at end "For purposes of this
section, an interest in a partnership which has in
effect a valid election under section 761(a) to be
excluded from the application of all of subchapter K
shall be treated as an interest in each of the assets of
such partnership and not as an interest in a
partnership."
Subsec. (f)(3). Pub. L. 101-508, Sec. 11701(h),
substitute "section 267(b) or 707(b)(1)" for "section
267(b)"
1989 - Subsecs. (f) to (h). Pub. L. 101-239 added
subsecs. (f) to(h).
1986 - Subsec. (a)(3)(A). Pub. L. 99-514 substituted
"on or before the day" for "before the day".
1984 - Subsec. (a). Pub. L. 98-369, Sec. 77(a), in
amending subsec. generally, designated existing
provisions as par. (1), substituted "No gain or loss
shall be recognized on the exchange of property held for
productive use in a trade or business or for investment
if such property is exchanged solely for property of
like kind which is to be held either for productive use
in a trade or business or for investment" for "No gain
or loss shall be recognized if property held for
productive use in trade or business or for investment
(not including stock in trade or other property held
primarily for sale, nor stocks, bonds, notes, chooses in
action, certificates of trust or beneficial interest, or
other securities or evidences of indebtedness or
interest) is exchanged solely for property of a like
kind to be held either for productive use in trade or
business or for investment", and added pars. (2) and
(3).
1969 - Subsec. (e). Pub. L. 91-172 added subsec. (e).
1959 - Subsecs. (b) to (d). Pub. L. 86-346 inserted
references to section 1037(a) in subsecs. (b) and (c)
and in first two sentences of subsec. (d).
1958 - Subsec. (d). Pub. L. 85-866 inserted in first
sentence a comma between "exchanged" and "decreased" and
"or decreased in the amount of loss", and substituted in
second sentence "subsection" for "paragraph".
EFFECTIVE DATE OF 1999
AMENDMENT
Amendment by Pub. L. 106-36 applicable to
transfers after Oct. 18, 1998, see section 3001(e) of
Pub. L. 106-36, set out as a noteunder section 351 of
this title.
EFFECTIVE DATE OF 1997
AMENDMENT
Section 1052(b) of Pub. L. 105-34 provided that:
"(1) In general. - The amendment made by this section
[amending this section] shall apply to transfers after
June 8, 1997, in taxable years ending after such date.
"(2) Binding contracts. - The amendment made by this
section shall not apply to any transfer pursuant to a
written binding contract in effect on June 8, 1997, and
at all times thereafter before the disposition of
property. A contract shall not fail to meet the
requirements of the preceding sentence solely because -
"(A) it provides for a sale in lieu of an exchange, or
"(B) the property to be acquired as replacement property
was not identified under such contract before June 9,
1997."
EFFECTIVE DATE OF 1990
AMENDMENT
Section 11701(h) of Pub. L. 101-508 provided that
the amendment made by that section is effective with
respect to transfers after Aug. 3, 1990. Section
11703(d)(2) of Pub. L. 101-508 provided that: "The
amendment made by paragraph (1) [amending this section]
shall applyto transfers after July 18, 1984."
EFFECTIVE DATE OF 1989
AMENDMENT
Section 7601(b) of Pub. L. 101-239 provided that: "(1)
In general. - Except as provided in paragraph (2), the
amendments made by this section [amending this section]
shall apply to transfers after July 10, 1989, in taxable
years ending after such date. "(2) Binding contract. -
The amendments made by this section shall not apply to
any transfer pursuant to a written binding contract in
effect on July 10, 1989, and at all times thereafter
before the transfer."
EFFECTIVE DATE OF 1986
AMENDMENT
Amendment by Pub. L. 99-514 effective, except as
otherwise provided, as if included in the provisions of
the Tax Reform Act of 1984, Pub. L. 98-369, div. A, to
which such amendment relates, see section 1881 of Pub.
L. 99-514, set out as a note under section 48of this
title.
EFFECTIVE DATE OF 1984
AMENDMENT
Section 77(b) of Pub. L. 98-369, as amended by Pub. L.
99-514, Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided
that: "(1) In general. - Except as otherwise provided in
this subsection, the amendment made by subsection (a)
[amending this section] shall apply to transfers made
after the date of the enactment of this Act [July 18,
1984] in taxable years ending after such date. "(2)
Binding contract exception for transfer of partnership
interests. - Paragraph (2)(D) of section 1031(a) of the
Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as
amended by subsection (a)) shall not apply in the case
of any exchange pursuant to a binding contract in effect
on March 1, 1984, and at all times thereafter before the
exchange. "(3) Requirement that property be identified
within 45 days and that exchange be completed within 180
days. - Paragraph (3) of section 1031(a) of the Internal
Revenue Code of 1986 (as amended by subsection (a))
shall apply - "(A) to transfers after the date of the
enactment of this Act [July 18, 1984], and "(B) to
transfers on or before such date of enactment if the
property to be received in the exchange is not received
before January 1, 1987.
In the case of any transfer on or before the date of the
enactment of this Act which the taxpayer treated as part
of a like-kind exchange, the period for assessing any
deficiency of tax attributable to the amendment made by
subsection (a) [amending this section] shall not expire
before January 1, 1988. "(4) Special rule where property
identified in binding contract.- If the property to be
received in the exchange is identified in a binding
contract in effect on June 13, 1984, and at all times
thereafter before the transfer, paragraph (3) shall be
applied - "(A) by substituting 'January 1, 1989' for
'January 1, 1987',and "(B) by substituting 'January 1,
1990' for 'January 1, 1988'."(5) Special rule for
like-kind exchange of partnership interests. - Paragraph
(2)(D) of section 1031(a) of the Internal Revenue Code
of 1986 (as amended by subsection (a)) shall not apply
to any exchange of an interest as general partner
pursuant to a plan of reorganization of ownership
interest under a contract which took effect on March 29,
1984, and which was executed on or before March 31,
1984, but only if all the exchanges contemplated by the
reorganization plan are completed on or before December
31, 1984."
EFFECTIVE DATE OF 1969
AMENDMENT
Section 212(c)(2) of Pub. L. 91-172, as amended by Pub.
L. 99-514, Sec. 2, Oct. 22, 1986, 100 Stat. 2095,
provided that: "The amendment made by paragraph (1)
[amending this section] shall apply to taxable years to
which the Internal Revenue Code of 1986[formerly I.R.C.
1954] applies."
EFFECTIVE DATE OF 1959
AMENDMENT
Amendment by Pub. L. 86-346 effective for taxable years
ending after Sept. 22, 1959, see section 203 of Pub. L.
86-346, set out as an Effective Date note under section
1037 of this title.
EFFECTIVE DATE OF 1958
AMENDMENT
Amendment by Pub. L. 85-866 applicable to taxable years
beginning after Dec. 31, 1953, and ending after Aug. 16,
1954, see section 1(c)(1) of Pub. L. 85-866, set out as
a note under section 165 of this title.
PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY
1, 1989
For provisions directing that if any amendments made by
subtitle A or subtitle C of title XI [Secs. 1101-1147
and 1171-1177] or title XVIII [Secs. 1800-1899A] of Pub.
L. 99-514 require an amendment to any plan, such plan
amendment shall not be required to be made before the
first plan year beginning on or after Jan. 1, 1989, see
section 1140 of Pub. L. 99-514, as amended, set out as a
note under section 401 of this title.
-SECREF-
SECTION REFERRED TO IN OTHER
SECTIONS
This section is referred to in sections 83, 197, 424,
453, 454,704, 857, 1035, 1036, 1037, 1060, 1245, 1250,
2032A, 2057 of thistitle.
-FOOTNOTE-
(!1) So in original. Probably should be
"subparagraphs".
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