LIKE-KIND EXCHANGES A. Like-Kind Exchanges (SS1031)---the exception to general rule that all gains are recognized. Basically preserves historical basis. i. Gain is still realized, it is just not yet recognized. TP maintains historical basis in one or more of the new assets, so any differences b/w that basis and the FMV of the assets preserves the opportunity to recognize gain/loss when the asset is later sold. ii. SS1031(a): In general, no gain or loss shall be recognized on the exchange of property (i) held for productive use in a trade or business or for investment if such property is exchanged (ii) solely for property of (iii) like kind which is (iv) to be held either for productive use in a trade or business or for investment. a. Note on T/B: For an item that has both personal and investment/
T/B/ qualities, inquiry is on primary use. Also, we only care about how the TP in question uses the property. Don't care about how the person with whom she exchanges will use it. b. Similar deduction (SS1033) allowed for replacements, where property has been involuntarily converted (e.g., by condemnation or physical destruction). iii. Meaning of Like Kind: a. Like kind refers to "nature and character" of the property, not its "grade or quality." So Ferrari for Kia is like-kind. (Reg SS1.1031(a) (1)(b)) b. Must be in same asset class. So farm house for city apartment is fine. Ferrari for Kia fine. Ferrari for tractor is not. (SS1.1031(a)(2)). c. Things that are not like-kind. o Stock in trade (inventory) (SS1031(a)). Otherwise would create huge tax shelters for companies to swap inventory. o Stock, partnership interests, and other securities(1031(a) (2)). o Goodwill is never like kind (in regs). o Livestock of different sex are not like kind (SS1031(e)) iv. Boot Payments (SS1031(b)): a. Allows for exchanges of like-kind property that are not exactly equal in value (which they almost never are) b. Gain realized on the transferred property will be recognized only up to the lesser of the boot or the amount of gain realized. o So if I buy house for $100K, it rises to $150K in value, and I trade it for a house worth $140K plus $10K cash, I have realized $50K gain, but I only recognize $10K now. c. For the person paying a boot you have to bifurcate into two exchanges to analyze tax consequences: o Exchange: The gain on his exchange of property for better like-kind property is realized, but not recognized, under

1031. o Sale: For tax purposes, the boot is him buying $20 worth of the better like-kind property for $20 (see Fred example in

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