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IRS.gov Website
Publication 544
taxmap/pubs/p544-006.htm#en_us_publink100072370

Nontaxable Exchanges(p11)

rule
Certain exchanges of property are not taxable. This means any gain from the exchange is not recognized, and any loss cannot be deducted. Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive.
taxmap/pubs/p544-006.htm#en_us_publink100072371

Like-Kind Exchanges(p11)

rule
Generally, if you exchange real property you use in your business or hold for investment solely for other business or investment real property of a like-kind, you do not recognize the gain or loss from the exchange. However, if you also receive non-like-kind property or money as part of the exchange, you recognize gain to the extent of the value of the other property or money you received in the exchange. And, you do not recognize any loss. In general, your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive in the exchange. See Qualifying property, later, for details on property that qualify and exceptions.
The exchange of property for the same kind of property is the most common type of nontaxable exchange. To be a like-kind exchange, the property traded and the property received must be both of the following. These two requirements are discussed later.
Additional requirements apply to exchanges in which the property received as like-kind property is not received immediately upon the transfer of the property given up. See Deferred Exchange, later.
If the like-kind exchange involves the receipt of money or unlike property or the assumption of your liabilities, see Partially Nontaxable Exchanges, later.
If the like-kind exchange involves a portion of a MACRS asset and gain is not recognized in whole or in part, the partial disposition rules in Treasury Regulations section 1.168(i)-8, See Adjusted Basis in Pub. 551 for more details and examples.
taxmap/pubs/p544-006.htm#en_us_publink100072372

Multiple-party transactions.(p12)

rule
The like-kind exchange rules also apply to property exchanges that involve three- and four-party transactions. Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section.
taxmap/pubs/p544-006.htm#en_us_publink100072373
Receipt of title from third party.(p12)
If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you still can treat this transaction as a like-kind exchange if it meets all the requirements.
taxmap/pubs/p544-006.htm#en_us_publink100072374

Basis of property received.(p12)

rule
If you acquire property in a like-kind exchange, the basis of the property you receive is generally the same as the basis of the property you transferred.
taxmap/pubs/p544-006.htm#en_us_publink1000269420

Example.(p12)

You exchanged real estate held for investment with an adjusted basis of $25,000 for other real estate held for investment. The basis of your new property is the same as the basis of the old property ($25,000).
For the basis of property received in an exchange that is only partially nontaxable, see Partially Nontaxable Exchanges, later.
taxmap/pubs/p544-006.htm#en_us_publink100072376

Money paid.(p12)

rule
If, in addition to giving up like-kind property, you pay money in a like-kind exchange, the basis of the property received is the basis of the property given up, increased by the money paid.
taxmap/pubs/p544-006.htm#en_us_publink100072380

Reporting the exchange.(p12)

rule
Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. The instructions for Form 8824 explain how to report the details of the exchange.
If you have any recognized gain because you received money or unlike property, report it on Form 8949, Schedule D (Form 1040), or Form 4797, as applicable. See chapter 4. You may have to report the recognized gain as ordinary income from depreciation recapture. See Like-Kind Exchanges and Involuntary Conversions in chapter 3.
taxmap/pubs/p544-006.htm#en_us_publink100072381

Exchange expenses.(p12)

rule
Exchange expenses generally are the closing costs you pay. They include such items as brokerage commissions, attorney fees, and deed preparation fees. Subtract these expenses from the consideration received to figure the amount realized on the exchange. If you receive cash or unlike property in addition to the like-kind property and realize a gain on the exchange, subtract the expenses from the cash or fair market value of the unlike property. Then, use the net amount to figure the recognized gain. See Partially Nontaxable Exchanges, later.
taxmap/pubs/p544-006.htm#en_us_publink100072382

Qualifying Property(p12)

rule
The nonrecognition rules for like-kind exchanges apply only to exchanges of real property held for investment or for productive use in your trade or business and not held primarily for sale. Exceptions apply to property disposed of before January 1, 2018, or to property received in an exchange before January 1, 2018
In a like-kind exchange, both the real property you give up and the real property you receive must be held by you for investment or for productive use in your trade or business. Buildings, land, and rental property are examples of property that may qualify.
The rules for like-kind exchanges do not apply to exchanges of the following property. You may have a nontaxable exchange under other rules. See Other Nontaxable Exchanges, later.
A dwelling unit (home, apartment, condominium, or similar property) may, for purposes of a like-kind exchange, qualify as property held for productive use in a trade or business or for investment purposes if certain requirements are met. See Revenue Procedure 2008-16, 2008-10 I.R.B. 547, available at IRS.gov/irb/2008-10_IRB/ar12.html.
An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. However, see Multiple Property Exchanges, later.
taxmap/pubs/p544-006.htm#en_us_publink100072383

Like-Kind Property(p12)

rule
To qualify for the non-recognition rules, there must be an exchange of like-kind property. Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. The exchange of real estate for real estate is an exchange of like-kind property.
An exchange of personal property for real property does not qualify as a like-kind exchange.
An exchange of city property for farm property, or improved property for unimproved property, is a like-kind exchange.
The exchange of real estate you own for a real estate lease that runs 30 years or longer is a like-kind exchange. However, not all exchanges of interests in real property qualify. The exchange of a life estate expected to last less than 30 years for a remainder interest is not a like-kind exchange.
An exchange of a remainder interest in real estate for a remainder interest in other real estate is a like-kind exchange if the nature or character of the two property interests is the same.
taxmap/pubs/p544-006.htm#TXMR635b4a9d

Foreign real property exchanges. (p12)

rule
Real property located in the United States and real property located outside the United States are not considered like-kind exchange rules. If you exchange foreign real property for property located in the United States, your gain or loss on the exchange is recognized. Foreign real property is real property not located in a state or the District of Columbia.
This foreign real property exchange rule does not apply to the replacement of condemned real property. Foreign and U.S. real property can still be considered like-kind property under the rules for replacing condemned property to postpone reporting gain on the condemnation. See Postponement of Gain under Involuntary Conversions, earlier.
taxmap/pubs/p544-006.htm#en_us_publink100072396

Deferred Exchange(p12)

rule
A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. (The property you receive is replacement property.) The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. In addition, the replacement property will not be treated as like-kind property unless the identification and the receipt requirements (discussed later) are met.
If, before you receive the replacement property, you actually or constructively receive money or unlike property in full consideration for the property you transfer, the transaction will be treated as a sale rather than a deferred exchange. In that case, you must recognize gain or loss on the transaction, even if you later receive the replacement property. It would be treated as if you bought the replacement property.
If, before you receive the replacement property, you actually or constructively receive money or unlike property in less than full consideration for the property you transfer, the transaction will be treated as a partially taxable exchange. See Partially Nontaxable Exchanges, later.
taxmap/pubs/p544-006.htm#en_us_publink1000145593

Actual and constructive receipt.(p13)

rule
For purposes of a deferred exchange, you actually receive money or unlike property when you receive the money or unlike property or receive the economic benefit of the money or unlike property. You constructively receive money or unlike property when the money or unlike property is credited to your account, set apart for you, or otherwise made available for you so that you can draw upon it at any time or so that you can draw upon it if you give notice of intention to do so. You do not constructively receive money or unlike property if your control of receiving it is subject to substantial limitations or restrictions. However, you constructively receive money or unlike property when the limitations or restrictions lapse, expire, or are waived.
The following rules also apply.
taxmap/pubs/p544-006.htm#en_us_publink100072397

Identification requirement.(p13)

rule
You must identify the property to be received within 45 days after the date you transfer the property given up in the exchange. This period of time is called the identification period. Any property received during the identification period is considered to have been identified.
If you transfer more than one property (as part of the same transaction) and the properties are transferred on different dates, the identification period and the exchange period begin on the date of the earliest transfer.
taxmap/pubs/p544-006.htm#en_us_publink100072398
Identifying replacement property.(p13)
You must identify the replacement property in a signed written document and deliver it to the person obligated to transfer the replacement property or any other person involved in the exchange other than you or a disqualified person. See Disqualified persons, later. You must clearly describe the replacement property in the written document. For example, use the legal description or street address for real property and the make, model, and year for a car. In the same manner, you can cancel an identification of replacement property at any time before the end of the identification period.
taxmap/pubs/p544-006.htm#en_us_publink100072399
Identifying alternative and multiple properties.(p13)
You can identify more than one replacement property. However, regardless of the number of properties you give up, the maximum number of replacement properties you can identify is:
If, as of the end of the identification period, you have identified more properties than permitted under this rule, the only property that will be considered identified is;
taxmap/pubs/p544-006.htm#en_us_publink100072400
Disregard incidental property.(p13)
Do not treat property incidental to a larger item of property as separate from the larger item when you identify replacement property. Property is incidental if it meets both the following tests.
For example, furniture, laundry machines, and other miscellaneous items of personal property will not be treated as separate property from an apartment building with a fair market value of $1,000,000, if the total fair market value of the furniture, laundry machines, and other personal property does not exceed
$150,000.
taxmap/pubs/p544-006.htm#en_us_publink100072401
Replacement property to be produced.(p13)
Gain or loss from a deferred exchange can qualify for nonrecognition even if the replacement property is not in existence or is being produced at the time you identify it as replacement property. If you need to know the fair market value of the replacement property to identify it, estimate its fair market value as of the date you expect to receive it.
taxmap/pubs/p544-006.htm#en_us_publink100072402

Receipt requirement.(p13)

rule
The property must be received by the earlier of the following dates. This period of time is called the exchange period. You must receive substantially the same property that met the identification requirement, discussed earlier.
taxmap/pubs/p544-006.htm#en_us_publink100072403
Replacement property produced after identification.(p13)
In some cases, the replacement property may have been produced after you identified it (as described earlier in Replacement property to be produced). In that case, to determine whether the property you received was substantially the same property that met the identification requirement, do not take into account any variations due to usual production changes. Substantial changes in the property to be produced, however, will disqualify it.
If your replacement property is real property that had to be produced and it is not completed by the date you receive it, it still may qualify as substantially the same property you identified. It will qualify only if, had it been completed on time, it would have been considered to be substantially the same property you identified. It is considered to be substantially the same only to the extent it is considered real property under local law. However, any additional production on the replacement property after you receive it does not qualify as like-kind property. To this extent, the transaction is treated as a taxable exchange of property for services.
taxmap/pubs/p544-006.htm#en_us_publink1000136761

Interest income.(p13)

rule
Generally, in a deferred exchange, if the amount of money or property you are entitled to receive depends upon the length of time between when you transfer the property given up and when you receive the replacement property, you are treated as being entitled to receive interest or a growth factor. The interest or growth factor will be treated as interest, regardless of whether it is paid in like-kind property, money, or unlike property. Include this interest in your gross income according to your method of accounting.
If you transferred property in a deferred exchange and an exchange facilitator holds exchange funds for you and pays you all the earnings on the exchange funds according to an escrow agreement, trust agreement, or exchange agreement, you must take into account all items of income, deduction, and credit attributable to the exchange funds.
If, in accordance with an escrow agreement, trust agreement, or exchange agreement, an exchange facilitator holds exchange funds for you and keeps some or all the earnings on the exchange funds in accordance with the escrow agreement, trust agreement, or exchange agreement, you will be treated as if you had loaned the exchange funds to the exchange facilitator. You must include in income any interest that you receive and, if the loan is a below-market loan, you must include in income any imputed interest.
Exchange funds include relinquished property, cash, or cash equivalent that secures an obligation of a transferee to transfer replacement property, or proceeds from a transfer of relinquished property, held in a qualified escrow account, qualified trust, or other escrow account, trust, or fund in a deferred exchange.
An exchange facilitator is a qualified intermediary, transferee, escrow holder, trustee, or other person that holds exchange funds for you in a deferred exchange under the terms of an escrow agreement, trust agreement, or exchange agreement.
For more information relating to the current taxation of qualified escrow accounts, qualified trusts, and other escrow accounts, trusts, and funds used during deferred exchanges of like-kind property, see Treasury Regulations sections 1.468B-6 and 1.7872-16. If the exchange facilitator is a qualified intermediary, see Safe Harbors Against Actual and Constructive Receipt in Deferred Exchanges below.
taxmap/pubs/p544-006.htm#en_us_publink1000145988

Disqualified persons.(p14)

rule
A disqualified person is a person who is any of the following.
  1. Your agent at the time of the transaction.
  2. A person who is related to you under the rules discussed in chapter 2 under Nondeductible loss, substituting "10%" for "50%."
  3. A person who is related to a person who is your agent at the time of the transaction under the rules discussed in chapter 2 under Nondeductible loss, substituting "10%" for "50%."
For purposes of (1) above, a person who has acted as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the 2-year period ending on the date of the transfer of the first of the relinquished properties is your agent at the time of the transaction. However, solely for purposes of whether a person is a disqualified person as your agent, the following services for you are not taken into account.
The rule in (3) above does not apply to a bank or a bank affiliate if it would otherwise be a disqualified person under the rule in (3) solely because it is a member of the same controlled group (as determined under section 267(f) of the Internal Revenue Code, substituting "10%" for "50%") as a person that has provided investment banking or brokerage services to the taxpayer within the 2-year period ending on the date of the transfer of the first of the relinquished properties. For this purpose, a bank affiliate is a corporation whose principal activity is rendering services to facilitate exchanges of property intended to qualify for nonrecognition of gain under section 1031 of the Internal Revenue Code and all of whose stock is owned by either a bank or a bank-holding company.
taxmap/pubs/p544-006.htm#en_us_publink100072404

Safe Harbors Against Actual and Constructive Receipt in Deferred Exchanges(p14)

rule
The following arrangements will not result in actual or constructive receipt of money or unlike property in a deferred exchange.
taxmap/pubs/p544-006.htm#en_us_publink1000136583

Security or guarantee arrangements. (p14)

rule
You will not actually or constructively receive money or unlike property before you actually receive the like-kind replacement property just because your transferee's obligation to transfer the replacement property to you is secured or guaranteed by one or more of the following.
  1. A mortgage, deed of trust, or other security interest in property (other than in cash or a cash equivalent).
  2. A standby letter of credit that satisfies all the following requirements.
    1. Not negotiable, whether by the terms of the letter of credit or under applicable local law;
    2. Not transferable (except together with the evidence of indebtedness which it secures), whether by the terms of the letter of credit or under applicable local law;
    3. Issued by a bank or other financial institution;
    4. Serves as a guarantee of the evidence of indebtedness which is secured by the letter of credit; and
    5. May not be drawn on in the absence of a default in the transferee's obligation to transfer the replacement property to you.
  3. A guarantee by a third person.
The protection against actual and constructive receipt ends when you have an immediate ability or unrestricted right to receive money or unlike property under the security or guarantee arrangement.
taxmap/pubs/p544-006.htm#en_us_publink1000136587

Qualified escrow account or qualified trust. (p14)

rule
You will not actually or constructively receive money or unlike property before you actually receive the like-kind replacement property just because your transferee's obligation is secured by cash or cash equivalent if the cash or cash equivalent is held in a qualified escrow account or qualified trust. This rule applies for the amounts held in the qualified escrow account or qualified trust even if you receive money or unlike property directly from a party to the exchange.
An escrow account is a qualified escrow account if both of the following conditions are met.
A trust is a qualified trust if both of the following conditions are met.
The protection against actual and constructive receipt ends when you have an immediate ability or unrestricted right to receive, pledge, borrow, or otherwise obtain the benefits of the cash or cash equivalent held in the qualified escrow account or qualified trust.
taxmap/pubs/p544-006.htm#en_us_publink1000136590

Qualified intermediary.(p14)

rule
If you transfer property through a qualified intermediary, the transfer of the property given up and receipt of like-kind property is treated as an exchange. This rule applies even if you receive money or unlike property directly from a party to the transaction other than the qualified intermediary.
A qualified intermediary is a person who is not a disqualified person (discussed earlier) and who enters into a written exchange agreement with you and, as required by that agreement:
For determining whether an intermediary acquires and transfers property, the following rules apply.
An intermediary is treated as entering into an agreement if the rights of a party to the agreement are assigned to the intermediary and all parties to that agreement are notified in writing of the assignment by the date of the relevant transfer of property.
The written exchange agreement must expressly limit your rights to receive, pledge, borrow, or otherwise obtain the benefits of money or unlike property held by the qualified intermediary.
taxmap/pubs/p544-006.htm#en_us_publink1000245880
Safe harbor method for reporting gain or loss when qualified intermediary defaults.(p14)
Generally, if a qualified intermediary is unable to meet its contractual obligations to you or otherwise causes you not to meet the deadlines for identifying or receiving replacement property in a deferred or reverse exchange, your transaction may not qualify as a tax-free deferred exchange. In that case, any gain may be taxable in the current year.
However, if a qualified intermediary defaults on its obligation to acquire and transfer replacement property because of bankruptcy or receivership proceedings, and you meet the requirements of Revenue Procedure 2010-14, you may be treated as not having actual or constructive receipt of the proceeds of the exchange in the year of sale of the property you gave up. If you meet the requirements, you can report the gain in the year or years payments (or debt relief treated as payments) are received, using the safe harbor gross profit ratio method. See Revenue Procedure 2010-14, 2010-12 I.R.B. 456, available at IRS.gov/irb/2010-12_IRB/ar07.html.
taxmap/pubs/p544-006.htm#en_us_publink1000136591
Multiple-party transactions involving related persons.(p15)
If you transfer property given up to a qualified intermediary in exchange for replacement property formerly owned by a related person, you may not be entitled to nonrecognition treatment if the related person receives cash or unlike property for the replacement property. (See Like-Kind Exchanges Between Related Persons, later.)
taxmap/pubs/p544-006.htm#en_us_publink1000138938

Interest or growth factors. (p15)

rule
You will not be in actual or constructive receipt of money or unlike property before you actually receive the like-kind replacement property just because you are or may be entitled to receive any interest or growth factor in the deferred exchange. This rule applies only if the agreement under which you are or may be entitled to the interest or growth factor expressly limits your rights to receive the interest or growth factor during the exchange period. See Additional restrictions on safe harbors below.
taxmap/pubs/p544-006.htm#en_us_publink1000138939

Additional restrictions on safe harbors. (p15)

rule
In order to come within the protection of the safe harbors against actual and constructive receipt of money and unlike property discussed above, the agreement must provide that you have no rights to receive, pledge, borrow, or otherwise obtain the benefits of money or unlike property before the end of the exchange period. However, the agreement can provide you with the following limited sets of rights.
taxmap/pubs/p544-006.htm#en_us_publink100072406

Like-Kind Exchanges Using Qualified Exchange Accommodation Arrangements (QEAAs)(p15)

rule
The like-kind exchange rules generally do not apply to an exchange in which you acquire replacement property (new property) before you transfer relinquished property (property you give up). However, if you use a qualified exchange accommodation arrangement (QEAA), the transfer may qualify as a like-kind exchange. For details, see Revenue Procedure 2000-37, 2000-40 I.R.B. 308, as modified by Revenue Procedure 2004-51, 2004-33 I.R.B. 294, available at IRS.gov/irb/2004-33_IRB/ar13.html.
Under a QEAA, either the replacement property or the relinquished property is transferred to an exchange accommodation titleholder (EAT), discussed later, who is treated as the beneficial owner of the property. However, for transfers of qualified indications of ownership (defined later), the replacement property held in a QEAA may not be treated as property received in an exchange if you previously owned it within 180 days of its transfer to the EAT. If the property is held in a QEAA, the IRS will accept the qualification of property as either replacement property or relinquished property and the treatment of an EAT as the beneficial owner of the property for federal income tax purposes.
taxmap/pubs/p544-006.htm#en_us_publink100072407

Requirements for a QEAA.(p15)

rule
Property is held in a QEAA only if all the following requirements are met.
taxmap/pubs/p544-006.htm#en_us_publink100072408

Written agreement.(p15)

rule
Under a QEAA, you and the EAT must enter into a written agreement no later than 5 business days after the qualified indications of ownership (discussed later) are transferred to the EAT. The agreement must provide all the following.
Property can be treated as being held in a QEAA even if the accounting, regulatory, or state, local, or foreign tax treatment of the arrangement between you and the EAT is different from the treatment required by the written agreement as discussed above.
taxmap/pubs/p544-006.htm#en_us_publink100072409
Bona fide intent.(p15)
When the qualified indications of ownership of the property are transferred to the EAT, it must be your bona fide intent that the property held by the EAT represents either replacement property or relinquished property in an exchange intended to qualify for nonrecognition of gain (in whole or in part) or loss under the like-kind exchange rules.
taxmap/pubs/p544-006.htm#en_us_publink100072410

Time limits for identifying and transferring property.(p15)

rule
Under a QEAA, the following time limits for identifying and transferring the property must be met.
  1. No later than 45 days after the transfer of qualified indications of ownership of the replacement property to the EAT, you must identify the relinquished property in a manner consistent with the principles for deferred exchanges. See Identification requirement, earlier, under Deferred Exchange.
  2. One of the following transfers must take place no later than 180 days after the transfer of qualified indications of ownership of the property to the EAT.
    1. The replacement property is transferred to you (either directly or indirectly through a qualified intermediary, defined earlier under Qualified intermediary).
    2. The relinquished property is transferred to a person other than you or a disqualified person. A disqualified person is either of the following.
      1. Your agent at the time of the transaction. This includes a person who has been your employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the 2-year period before the transfer of the relinquished property.
      2. A person who is related to you or your agent under the rules discussed in chapter 2 under Nondeductible Loss, substituting "10%" for "50%."
  3. The combined time period the relinquished property and replacement property are held in the QEAA cannot be longer than 180 days.
taxmap/pubs/p544-006.htm#en_us_publink100072411

Exchange accommodation titleholder (EAT).(p15)

rule
The EAT must meet all the following requirements.
taxmap/pubs/p544-006.htm#en_us_publink100072412
Qualified indications of ownership.(p16)
Qualified indications of ownership are any of the following.
taxmap/pubs/p544-006.htm#en_us_publink100072413

Other permissible arrangements.(p16)

rule
Property will not fail to be treated as being held in a QEAA as a result of certain legal or contractual arrangements, regardless of whether the arrangements contain terms that typically would result from arm's-length bargaining between unrelated parties for those arrangements. For a list of those arrangements, see Revenue Procedure 2000-37.
taxmap/pubs/p544-006.htm#en_us_publink100072414

Partially Nontaxable Exchanges(p16)

rule
If, in addition to like-kind property, you receive money or unlike property in an exchange of like-kind property on which you realize a gain, you may have a partially nontaxable exchange. If you realize a gain on the exchange, you must recognize the gain you realize (see Amount recognized, earlier) to the extent of the money and the fair market value of the unlike property you receive in the exchange. If you realize a loss on the exchange, no loss is recognized. However, see Unlike property given up below.
The recognized (taxable) gain on the disposition of the like-kind property you give up is the smaller of two amounts. The first is the amount of gain realized. See Gain or Loss From Sales and Exchanges, earlier. The second is the limit of recognized gain. To figure the limit on recognized gain, add the money you received and the fair market value of any unlike property you received. Reduce this amount (but not below zero) by any exchange expenses (closing costs) you paid. Compare that amount to your gain realized. Your recognized (taxable) gain is the smaller of the two.
taxmap/pubs/p544-006.htm#en_us_publink100072417

Example.(p16)

You exchange real estate held for investment with an adjusted basis of $8,000 for other real estate you now hold for investment. The fair market value (FMV) of the real estate you received was $10,000. You also received $1,000 in cash. You paid $500 in exchange expenses.
FMV of like-kind property received$10,000
Cash1,000
Total received$11,000
Minus: Exchange expenses paid(500)
Amount realized$10,500
Minus: Adjusted basis of property you transferred(8,000)
Realized gain$2,500

Although the total gain realized on the transaction is $2,500, the recognized (taxable) gain is only $500, figured as follows.
Money received (cash) $1,000
Minus: Exchange expenses paid(500)
Recognized gain$500
taxmap/pubs/p544-006.htm#en_us_publink100072418

Assumption of liabilities.(p16)

rule
For purposes of figuring your realized gain, add any liabilities assumed by the other party to your amount realized. Subtract any liabilities of the other party that you assume from your amount realized.
For purposes of figuring the limit of recognized gain, if the other party to a nontaxable exchange assumes any of your liabilities, you will be treated as if you received money in the amount of the liability. You can decrease (but not below zero) the amount of money you are treated as receiving by the amount of the other party's liabilities that you assume and by any cash you pay, or unlike property you give up. For more information on the assumption of liabilities, see section 357(d) of the Internal Revenue Code. For more information on the treatment of the assumption of liabilities in a sale or exchange, see Treasury Regulations section 1.1031(d)-2.
taxmap/pubs/p544-006.htm#en_us_publink100072419

Example.(p16)

The facts are the same as in the previous example, except the property you gave up was subject to a $3,000 mortgage for which you were personally liable. The other party in the trade agreed to pay off the mortgage. Figure the gain realized as follows.
FMV of like-kind property received$10,000
Cash1,000
Mortgage assumed by other party3,000
Total received$14,000
Minus: Exchange expenses(500)
Amount realized$13,500
Minus: Adjusted basis of property you transferred(8,000)
Realized gain$5,500

The realized gain is recognized (taxable) gain only up to $3,500, figured as follows.
Money received (cash) $1,000
Money received (liability assumed by other party)3,000
Total money and unlike property received$4,000
Minus: Exchange expenses paid(500)
Recognized gain$3,500
taxmap/pubs/p544-006.htm#en_us_publink1000147848

Example.(p16)

The facts are the same as in the previous example, except the property you received had an FMV of $14,000 and was subject to a $4,000 mortgage that you assumed. Figure the gain realized as follows.
FMV of like-kind property received$14,000
Cash1,000
Mortgage assumed by other party3,000
Total received$18,000
Minus: Exchange expenses(500)
Amount realized$17,500
Minus: Adjusted basis of property you transferred(8,000)
Minus: Mortgage you assumed(4,000)
Realized gain$5,500

The realized gain is recognized (taxable) gain only up to $500, figured as follows.
Money received (cash) $1,000
Money received (net liabilities assumed by other party): 
Mortgage assumed by other party $3,000
Minus: Mortgage you assumed(4,000)
 Total (not below zero)$0
Total money and unlike property received$1,000
Minus: Exchange expenses paid(500)
Recognized gain$500
taxmap/pubs/p544-006.htm#en_us_publink100072420

Unlike property given up.(p16)

rule
If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. The gain or loss is equal to the difference between the fair market value of the unlike property and the adjusted basis of the unlike property.
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Example.(p16)

You exchange stock and real estate you held for investment for real estate you also intend to hold for investment. The stock you transfer has a fair market value of $1,000 and an adjusted basis of $4,000. The real estate you exchange has a fair market value of $19,000 and an adjusted basis of $15,000. The real estate you receive has a fair market value of $20,000. You do not recognize gain on the exchange of the real estate because it qualifies as a nontaxable exchange. However, you must recognize (report on your return) a $3,000 loss on the stock because it is unlike property.
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Basis of property received.(p16)

rule
The total basis for all properties (other than money) you receive in a partially nontaxable exchange is the total adjusted basis of the properties you give up, with the following adjustments.
  1. Add both the following amounts.
    1. Any additional costs you incur.
    2. Any gain you recognize on the exchange.
  2. Subtract both the following amounts.
    1. Any money you receive.
    2. Any loss you recognize on the exchange.
Allocate this basis first to the unlike property, other than money, up to its fair market value on the date of the exchange. The rest is the basis of the like-kind property.
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Multiple Property Exchanges(p16)

rule
Under the like-kind exchange rules, you generally must make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. In these situations, you figure your recognized gain and the basis of the property you receive by comparing the properties within each exchange group.
taxmap/pubs/p544-006.htm#en_us_publink100072436

Like-Kind Exchanges Between Related Persons(p17)

rule
Special rules apply to like-kind exchanges between related persons. These rules affect both direct and indirect exchanges. Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. The gain or loss on the original exchange must be recognized as of the date of the later disposition.
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Related persons.(p17)

rule
Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc.), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits.
EIC
An exchange structured to avoid the related party rules is not a like-kind exchange. See Like-Kind Exchanges Between Related Persons, earlier.
For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2.
taxmap/pubs/p544-006.htm#en_us_publink100072439

Example.(p17)

You own real property used in your business. Your sister owns real property used in her business. In December 2018, you exchanged your property plus $15,000 for your sister's property. At that time, the fair market value of your real property was $200,000 and its adjusted basis was $65,000. The fair market value of your sister's real property was $215,000 and its adjusted basis was $70,000. You realized a gain of $135,000 (the $215,000 fair market value of the real property received, minus the $15,000 you paid, minus your $65,000 adjusted basis in the property). Your sister realized a gain of $145,000 (the $200,000 fair market value of your real property, plus the $15,000 you paid, minus her $70,000 adjusted basis in the property).
However, because this was a like-kind exchange and you received no cash or non-like-kind property in the exchange, you recognize no gain on the exchange. Your basis in the real property you received is $80,000 (the $65,000 adjusted basis of the real property given up plus the $15,000 you paid). Your sister recognizes gain only to the extent of the money she received, $15,000. Her basis in the real property she received was $70,000 (the $70,000 adjusted basis of the real property she exchanged minus the $15,000 received, plus the $15,000 gain recognized).
In 2019, you sold the real property you received to a third party for $220,000. Because you sold property you acquired from a related party (your sister) within 2 years after the exchange with your sister, that exchange is disqualified from nonrecognition treatment and the deferred gain must be recognized on your 2019 return. On your 2019 tax return, you must report your $135,000 gain on the 2018 exchange. You also must report the gain on the 2019 sale on your 2019 return.
Additionally, your sister must report on her 2019 tax return gain of $130,000, which is the $145,000 gain on the 2018 exchange, minus the $15,000 she recognized in 2018. Her adjusted basis in the property is increased to $200,000 (its $70,000 basis plus the $130,000 gain recognized).
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Two-year holding period.(p17)

rule
The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. If the holder's risk of loss on the property is substantially diminished during any period, however, that period is not counted toward the 2-year holding period. The holder's risk of loss on the property is substantially diminished by any of the following events.
A put is an option that entitles the holder to sell property at a specified price at any time before a specified future date.
A short sale involves property you generally do not own. You borrow the property to deliver to a buyer and, at a later date, buy substantially identical property and deliver it to the lender.
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Exceptions to the rules for related persons.(p17)

rule
The following kinds of property dispositions are excluded from these rules.
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Other Nontaxable Exchanges(p17)

rule
The following discussions describe other exchanges that may not be taxable.
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Partnership Interests(p17)

rule
Exchanges of partnership interests do not qualify as nontaxable exchanges of like-kind property. This applies regardless of whether they are general or limited partnership interests or are interests in the same partnership or different partnerships. However, under certain circumstances the exchange may be treated as a tax-free contribution of property to a partnership. See Pub. 541, Partnerships.
An interest in a partnership that has a valid election to be excluded from being treated as a partnership for federal tax purposes is treated as an interest in each of the partnership assets and not as a partnership interest. See Pub. 541.
taxmap/pubs/p544-006.htm#en_us_publink100072444

U.S. Treasury Notes or Bonds(p17)

rule
Certain issues of U.S. Treasury obligations may be exchanged for certain other issues designated by the Secretary of the Treasury with no gain or loss recognized on the exchange. See U.S. Treasury Bills, Notes, and Bonds under Interest Income in Pub. 550 for more information on the tax treatment of income from these investments.
taxmap/pubs/p544-006.htm#en_us_publink100072447

Insurance Policies and Annuities(p17)

rule
No gain or loss is recognized if you make any of the following exchanges, and if the insured or the annuitant is the same under both contracts.
In addition, if certain conditions are met, no gain or loss is recognized on the direct transfer of a portion of the cash surrender value of an existing annuity contract for a second contract, regardless of whether the contracts are issued by the same or different companies. For more information on the applicable contracts, see Revenue Procedure 2011-38, 2011-30 I.R.B. 66, available at IRS.gov/irb/2011-30_IRB/ar09.html.
If you realize a gain on the exchange of an endowment contract or annuity contract for a life insurance contract or an exchange of an annuity contract for an endowment contract, you must recognize the gain.
For information on transfers and rollovers of employer-provided annuities, see Pub. 575, Pension and Annuity Income, or Pub. 571, Tax-Sheltered Annuity Plans (403(b) Plans) for Employees of Public Schools and Certain Tax-Exempt Organizations.
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Cash received.(p17)

rule
The nonrecognition and nontaxable transfer rules do not apply to a rollover in which you receive cash proceeds from the surrender of one policy and invest the cash in another policy. However, you can treat a cash distribution and reinvestment as meeting the nonrecognition or nontaxable transfer rules if all the following requirements are met.
  1. When you receive the distribution, the insurance company that issued the policy or contract is subject to a rehabilitation, conservatorship, insolvency, or similar state proceeding.
  2. You withdraw all amounts to which you are entitled or, if less, the maximum permitted under the state proceeding.
  3. You reinvest the distribution within 60 days after receipt in a single policy or contract issued by another insurance company or in a single custodial account.
  4. You assign all rights to future distributions to the new issuer for investment in the new policy or contract if the distribution was restricted by the state proceeding.
  5. You would have qualified under the nonrecognition or nontaxable transfer rules if you had exchanged the affected policy or contract for the new one.
If you do not reinvest all of the cash distribution, the rules for partially nontaxable exchanges, discussed earlier, apply.
In addition to meeting these five requirements, you must do both the following.
  1. Give to the issuer of the new policy or contract a statement that includes all the following information.
    1. The gross amount of cash distributed.
    2. The amount reinvested.
    3. Your investment in the affected policy or contract on the date of the initial cash distribution.
  2. Attach the following items to your timely filed tax return for the year of the initial distribution.
    1. A statement titled "Election under Revenue Procedure 92-44" that includes the name of the issuer and the policy number (or similar identifying number) of the new policy or contract.
    2. A copy of the statement given to the issuer of the new policy or contract.
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Property Exchanged for Stock(p18)

rule
If you transfer property to a corporation in exchange for stock in that corporation (other than nonqualified preferred stock, described later), and immediately afterward you are in control of the corporation, the exchange is usually not taxable. This rule applies to transfers by one person and to transfers by a group. It does not apply in the following situations.
This rule also applies to the transfer of a portion of a MACRS asset in exchange for stock in a corporation you control immediately after the exchange. See the partial disposition rules in Treasury Regulations section 1.168(i)-8.
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Control of a corporation.(p18)

rule
To be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.
Deposit
The control requirement can be met even though there are successive transfers of property and stock. For more information, see Revenue Ruling 2003-51, 2003-21 I.R.B. 938.
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Example 1.(p18)

You and Bill Jones buy property for $100,000. You both organize a corporation when the property has a fair market value of $300,000. You transfer the property to the corporation for all its authorized capital stock, which has a par value of $300,000. No gain is recognized by you, Bill, or the corporation.
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Example 2.(p18)

You and Bill transfer the property with a basis of $100,000 to a corporation in exchange for stock with a fair market value of $300,000. This represents only 75% of each class of stock of the corporation. The other 25% was already issued to someone else. You and Bill recognize a taxable gain of $200,000 on the transaction.
taxmap/pubs/p544-006.htm#en_us_publink100072454

Services rendered.(p18)

rule
The term property does not include services rendered or to be rendered to the issuing corporation. The value of stock received for services is income to the recipient.
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Example.(p18)

You transfer property worth $35,000 and render services valued at $3,000 to a corporation in exchange for stock valued at $38,000. Right after the exchange, you own 85% of the outstanding stock. No gain is recognized on the exchange of property. However, you recognize ordinary income of $3,000 as payment for services you rendered to the corporation.
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Property of relatively small value.(p18)

rule
The term "property"does not include property of a relatively small value when it is compared to the value of stock and securities already owned or to be received for services by the transferor if the main purpose of the transfer is to qualify for the nonrecognition of gain or loss by other transferors.
Property transferred will not be considered to be of relatively small value if its fair market value is at least 10% of the fair market value of the stock and securities already owned or to be received for services by the transferor.
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Stock received in disproportion to property transferred.(p18)

rule
If a group of transferors exchange property for corporate stock, each transferor does not have to receive stock in proportion to his or her interest in the property transferred. If a disproportionate transfer takes place, it will be treated for tax purposes in accordance with its true nature. It may be treated as if the stock were first received in proportion and then some of it used to make gifts, pay compensation for services, or satisfy the transferor's obligations.
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Money or other property received.(p18)

rule
If, in an otherwise nontaxable exchange of property for corporate stock, you also receive money or property other than stock, you may have to recognize gain. You must recognize gain only up to the amount of money plus the fair market value of the other property you receive. The rules for figuring the recognized gain in this situation generally follow those for a partially nontaxable exchange discussed earlier under Like-Kind Exchanges. If the property you give up includes depreciable property, the recognized gain may have to be reported as ordinary income from depreciation. See chapter 3.
Note. You cannot recognize or deduct a loss.
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Nonqualified preferred stock.(p18)
Nonqualified preferred stock is treated as property other than stock. Generally, it is preferred stock with any of the following features. For a detailed definition of nonqualified preferred stock, see section 351(g)(2) of the Internal Revenue Code.
taxmap/pubs/p544-006.htm#en_us_publink100072460
Liabilities.(p18)
If the corporation assumes your liabilities, the exchange generally is not treated as if you received money or other property. There are two exceptions to this treatment. For more information on the assumption of liabilities, see section 357(d) of the Internal Revenue Code.
taxmap/pubs/p544-006.htm#en_us_publink100072461

Example.(p18)

You transfer property to a corporation for stock. Immediately after the transfer, you control the corporation. You also receive $10,000 in the exchange. Your adjusted basis in the transferred property is $20,000. The stock you receive has a fair market value (FMV) of $16,000. The corporation also assumes a $5,000 mortgage on the property for which you are personally liable. Gain is realized as follows.
FMV of stock received$16,000
Cash received10,000
Liability assumed by corporation 5,000
Total received$31,000
Minus: Adjusted basis of property transferred 20,000
Realized gain$11,000
The liability assumed is not treated as money or other property. The recognized gain is limited to $10,000, the cash received.