Section 1031 of the Internal Revenue Code provides an exception to the general rule that gain or loss must be realized upon the sale or exchange of property. In general, this provision enables a taxpayer to exchange property for other property of a “like kind” in a tax-free transaction. Sounds easy enough, right? Unfortunately for taxpayers, there are numerous technical requirements and procedures that must be complied with in order for a transaction to qualify for nonrecognition treatment under section 1031. Two recent Tax Court cases provide real estate professionals with a friendly reminder of just how easy it is to stumble into one of many section 1031 pitfalls.
Background
Section 1031 provides that no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if it is exchanged solely for property of a “like kind” which is to be held either for productive use in a trade or business or for investment. If a transaction would have been tax-free under section 1031 but for the fact that the taxpayer receives both qualifying replacement property and “boot” (e.g., money or non-like kind property), then the taxpayer recognizes gain from its disposition of the relinquished property to the extent of the boot received.
