Like-kind exchanges under Section 1031 of the Internal Revenue Code provide taxpayers with the vital ability to dispose of real property tax-free. Unfortunately, like-kind exchanges are rarely as simple as directly swapping one property for another. Much more common are more complex multiple-party “deferred” or “reverse” exchanges in which the disposition of the relinquished property and the acquisition of replacement property are not simultaneous. A recent lawsuit involving a real estate owner that sued its qualified intermediary provides an all-too-common example of a dismayed taxpayer that unexpectedly recognized gain as a result of the improper structuring of a like-kind exchange.
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 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.
