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TAX

Remember that time is of the essence
The Tax Adviser and Tax Section in executing a successful tax-deferred swap.
Identifying multiple replacement properties
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digital replica online in addition to access to a tax resource library, properties become unavailable before the end of the
member-only newsletter, and four free webcasts. The Tax Section is
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and more. Learn more at us.aicpa.org/tax-section.
THE NATURE OF A LIKE-KIND EXCHANGE
It is unlikely that an investor who wishes
to exchange investment or commercial use
and your accounting expertise may be essential in property would be able to execute a simultane-
helping the taxpayer locate an appropriate QI and ous transfer with a like-minded investor. Rather,
in consulting on the exchange. Skill, expertise, and the exchange would likely be accomplished in
integrity are crucial characteristics for the chosen two sales transactions such that the relinquished
intermediary. For an excellent resource on this property is first sold to an independent third
topic, see Ray and Lynch, “Selecting a Qualified In- party, with the proceeds held in escrow, until
termediary for a Like-Kind Exchange,” CPA Journal replacement property or properties can be
(October 2016), available at tinyurl.com/2wzrshtu. identified and acquired. Generally, a like-kind
exchange would more likely take place in stages:
Issue No. 4: Build in flexibility relinquishment of appreciated property or prop-
Taxpayers who wish to utilize the rules of Sec. 1031 erties, identification of replacement property
are not limited to a one-for-one property exchange. or properties, and acquisition of replacement
According to Regs. Sec. 1.1031(k)-1(c)(4), more property or properties and transfer of the prop-
than one replacement property may be identified. erty or properties to the taxpayer. Furthermore,
In fact, taxpayers may identify up to three replace- these stages would likely occur over a period of
ment properties of any fair market value (FMV) by weeks or months.
the end of the 45-day identification period, or any As a practical matter, the Sec. 1031 exchange
number of properties so long as their total FMV is usually facilitated by executing an exchange
does not exceed 200% of the total FMV of the agreement with a QI to ensure that the taxpayer
relinquished property or properties as of the date of never has access to the sales proceeds from the
their transfer. relinquished property. If the taxpayer receives
For example, a taxpayer who wishes to relinquish any of the proceeds from the relinquished
an apartment building with an FMV of $2.2 mil- property in cash or other property that is not
lion in a like-kind exchange may identify multiple of like kind, this amount is considered “boot”
replacement properties in the following manner: and is immediately taxable (Sec. 1031(b)).
an office building with an FMV of $1.4 million, Likewise, if the taxpayer is relieved of any debt
a warehouse with an FMV of $1.1 million, a second resulting from the Sec. 1031 exchange, the
warehouse with an FMV of $1 million, and a rental reduction in debt is considered taxable boot as
house with an FMV of $700,000, equaling a total well. To avoid taxable boot, the newly acquired
FMV of $4.2 million. Provided that the replace- property must be of equal or greater value than
ment properties are identified in writing within the relinquished property, and any mortgage
the 45-day identification period, the taxpayer is in on the replacement property should be of equal
compliance with the 200% rule because the identi- or greater debt. For illustrative purposes, our
fied replacement properties have a total FMV that discussion here is limited to exchanges involving
is less than 200% of the FMV of the relinquished appreciated property, since gain deferral is the
apartment building. focus of this article.
If, at the end of the 45-day identification period
that applies in a deferred like-kind exchange, a ILLUSTRATION
taxpayer has identified more replacement proper- Taxpayer A owns an office building that she
ties than allowed under these rules, the taxpayer purchased in 2011 for $2,100,000 with a current
is treated as if no replacement property had been mortgage of $1,000,000. A improved the building
identified. However, certain exceptions apply to this with a new roof several years ago and took annual
rule (see Regs. Sec. 1.1031(k)-1(c)(4)(ii)). depreciation deductions so that the current adjusted

34 | Journal of Accountancy January 2022