Page 341 - Small Business IRS Training Guides

Properties are of a “like-kind” under Treas. Reg. §1.1031(a)-1(b) and (c) if they are of the same nature or character even if
they differ in grade or quality. Real properties generally are of a like-kind, regardless of whether they are improved or not.

For example, an apartment building would be of a like-kind to another apartment building or to an unimproved parcel of
land held either for productive use in a trade or business or for investment.

Example #1: Tom simultaneously exchanges real property containing a single family residential rental structure for

another residential lot containing a duplex he plans on renting to tenants. The property qualifies for like-kind exchange
treatment. Both properties are real property and both properties are either being held for productive use in a trade or
business or for investment under IRC § 1031(a). This is true regardless of what year the exchange occurs since the real

property qualifies under TCJA and prior to the effective date of its implementation.

Example #2: Cindy owns vacant land for investment and wants to acquire rental property. Alex owns a multi-family
apartment complex, all of which is rented, and wants to acquire land to build his new home. Cindy and Alex exchange

properties on July 31, 2018. Since Cindy owned and held vacant land for investment purposes and is acquiring real
property for rental purposes, i.e., property to be “held for the productive use in a trade or business or for investment,” the

exchange will qualify for IRC § 1031 treatment as it relates to Cindy.

With respect to Alex, the exchange will not qualify for IRC § 1031 deferred recognition because Alex intends to use the
land he acquired from Cindy for personal purposes and not for productive use in a trade business or for investment. It

does not matter that the real property Alex relinquishes otherwise meets the qualifications under IRC § 1031. In a like-kind
exchange, both the property relinquished and property received by a taxpayer must be qualifying property.

Example #3: Tom simultaneously exchanges an old tractor used in his farming trade or business for a new replacement

tractor. If the exchange occurs on or before December 31, 2017, the exchange will qualify for deferred recognition of gain
or loss under § 1031. If the exchange occurs after December 31, 2017, it will not qualify for deferred recognition treatment.

Example #4: The facts are the same as in Example #3 above, except Tom’s exchange is a deferred like-kind exchange
and Tom uses a qualified intermediate (QI) to facilitate the like-kind exchange. He relinquishes the old tractor to the QI on

December 28, 2017, but does not acquire another tractor until February 3, 2018. Since Tom relinquished the tractor on or
before December 31, 2017, the exchange will qualify for like-kind exchange treatment under the transition rules of TCJA

Section 13303(c) if all of the other requirements of IRC § 1031 are met.

73233-102 13303-5 Tax Cuts and Jobs Act