7773. What kinds of real estate may be exchanged for other real estate tax-free?Nuco Employeercline202014-07-14T17:55:00Z2014-07-14T17:55:00Z611456532Summit Business Media5415766214Site Map/Investments/Real Estate/ExchangeTaxFactsDefaultArticle122671237-00-tf2.xml1237.00;#1930;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2What kinds of real estate may be exchanged for other real estate tax-free?32600.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T22:45:00Z7773. What kinds of real estate may be exchanged for other real estate tax-free?Neither gain nor loss is recognized in an exchange of real property held for productive use in a trade or business or for investment for property of a like kind that is also to be held either for productive use in a trade or business or for investment.IRC Sec. 1031(a). (Indeed, recognition is not permitted.) However, any gain realized will be recognized to the extent money or other property not of like kind, including net relief from debt, is received in the exchange.IRC Sec. 1031(b). Also, gain or loss will generally be recognized if either of the properties exchanged in a like-kind exchange between related persons is disposed of within two years thereafter.IRC Sec. 1031(f). It is possible for an exchange to be tax-free to one party but not to the other. See Q 535 for an explanation of the general rules applicable to like-kind exchanges.To be of like kind, the properties must be of the same nature or character, but not necessarily of the same grade or quality. Unproductive real estate held by one other than a dealer for future use or future realization of increase in value is considered held for investment. Property held for investment may be exchanged for property held for productive use in a trade or business and vice versa. Unimproved land may be exchanged for improved land. City real estate may be exchanged for a ranch.Treas. Reg. §1.1031(a)-1. Rental real estate may be exchanged for a farm.Rev. Rul. 72-151, 1972-1 CB 225. An empty lot held as investment property may be exchanged for two townhouses to be constructed and used as rental property.Let. Rul. 9431025.Even partial interests in real estate have been held to be like-kind property. Two leasehold interests have been held to be of like kind.Rev. Rul. 76-301, 1976-2 CB 241. A lease for thirty years or more may be exchanged for an entire (fee simple) ownership interest.Rev. Rul. 78-72, 1978-1 CB 258; Treas. Reg. §1.1031(a)-1(c)(2). A remainder interest in real property held for investment qualified as of like kind to a fee interest in real property held for investment or use in a trade or business.Let. Rul. 9143053. Undivided interests in three parcels of land held by three tenants in common were exchanged so that each received a 100 percent interest in one parcel in a nontaxable like-kind exchange.Rev. Rul. 73-476, 1973-2 CB 300. Similarly, the fractional tenancy-in-common interests of related parties may be exchanged for a fee simple interest in real estate.Let. Rul. 9543011. Surrender of the interests of shareholders in a housing cooperative (stock and proprietary leases with 30 or more years to run) in exchange for condominium interests in the same underlying property qualified as a like-kind exchange, when the taxpayer rented out the units and the property was therefore held for productive use in a trade or business or for investment. (Whether rights in a housing cooperative or in a condominium constitute an interest in real estate depends on state law).Let. Ruls. 8443054, 8445010. Exchange of an agricultural conservation easement for an unencumbered fee-simple interest in another farm qualified as a like-kind exchange.Let. Rul. 9215049.Mineral interests have been exchanged for other mineral interests.Fleming v. Campbell, 205 F.2d 549 (5th Cir. 1953). Mineral interests have also been exchanged for entire interests.Comm. v. Crichton, 122 F.2d 181 (5th Cir. 1941); Rev. Rul. 55-749, 1955-2 CB 295. Timber rights have been exchanged for entire interests in timberland.Everett v. Comm., TC Memo 1978-53; Rev. Rul. 72-515, 1972-2 CB 466; Starker v. U.S., 75-1 USTC ¶9443 (D. Ore. 1975). However, an exchange of the right to cut standing timber for tracts of timberland did not qualify as a like-kind exchange.TAM 9525002.Even if the property is of like kind to other property in an exchange, nonrecognition of gain will be denied unless the property is “held for productive use in a trade or business or for investment” and the replacement property is likewise to be “held for productive use in a trade or business or for investment.” This “holding” requirement is not met where an individual acquires property in the exchange for the purpose of selling it or otherwise liquidating it.Regals Realty Co. v. Comm., 127 F.2d 931 (2d Cir. 1942); Black v. Comm., 35 TC 90 (1960); Klarkowski v. Comm., TC Memo 1965-328, aff’d on other issues, 385 F.2d 398 (7th Cir. 1967); Bernard v. Comm., TC Memo 1967-176; Rev. Rul. 75-292, 1975-2 CB 333.The Internal Revenue Service takes the position that the “holding” requirement is not met unless the property is owned over a period of time with the intention of making money rather than for personal reasons. The Service determined in a letter ruling that where an individual acquired property in an exchange with the intent to hold the property for use in a trade or business or as an investment for at least two years but then to sell it, the holding requirement was met.Let. Rul. 8429039. The IRS also takes the position that if an individual acquires the property in order to exchange it, the transfer will not qualify with respect to that individual because the property is not held for business or investment purposes.Rev. Rul. 75-291, 1975-2 CB 332; Rev. Rul. 84-121, 1984-2 CB 168. Property received in the liquidation of a corporation and immediately exchanged did not qualify for tax-free exchange because it had not been held for productive use in a trade or business or for investment by the taxpayer.Rev. Rul. 77-337, 1977-2 CB 305.However, the Tax Court and the Ninth Circuit Court of Appeals have not been quite so strict. Where property held for investment was exchanged for like-kind property with the intent of immediately contributing the property acquired in the exchange to a partnership for a general partnership interest (itself a nonrecognition transaction), the exchange was held to meet the requirement that the acquired property be “held” for investment or productive use in a trade or business, where the purpose of the partnership was to hold the property for investment and where the total assets of the partnership were predominantly of a kind like the taxpayer’s original property. The court saw a continuity of holding, although it was as a partner instead of as an individual, which distinguished the situation from those involving an intent to sell or liquidate the property.Magneson v. Comm.,753 F2d 1490, 85-1 USTC ¶9205 (9th Cir. 1985), aff’g 81 TC 767 (1983). Where an individual acquired property in a corporate liquidation and immediately agreed to exchange it, the court ruled the holding requirement was met, saying that all that is required is that the individual own property that the individual does not intend to liquidate or use for personal pursuits. The court concluded that an intent to exchange for like-kind property is consistent with holding the property for investment.Bolker v. Comm., 760 F2d 1039, 85-1 USTC ¶9400 (9th Cir. 1985), aff’g 81 TC 782 (1983). However, in a case where it was not to the taxpayer’s advantage to receive like-kind treatment, another court held that property acquired for the purpose of immediate use in an exchange was not property held for investment.Barker v. U.S.,668 F Supp 1199, 87-2 USTC ¶9444 (C.D. Ill. 1987).Property can qualify for tax-free exchange even where the owner has sold to the other party an option either to purchase the land or to exchange similar property for it.Rev. Rul. 84-121, above. However, if the like-kind exchange is between related persons, an option could operate to extend the 2-year period during which nonrecognition is defeated by a disposition of the property (see Q 535).Partnership interests cannot be like-kind property, regardless of whether they are general or limited, and regardless of whether they are interests in the same or different partnerships.Treas. Reg. §1.1031(a)-1(a)(1). However, the IRC provides that if a partnership has in effect a valid election under IRC Section 761(a) to be excluded from the application of the IRC partnership provisions (Subchapter K), it is subject to a special rule. Such an interest will be treated, for purposes of IRC Section 1031, as an interest in each of the assets of the partnership, not as an interest in the partnership itself.IRC Sec. 1031(a)(2); Treas. Reg. §1.1031(a)-1(a).Exchanges of depreciable tangible personal property held for business or investment purposes (such as lamps, carpet, and other furnishings in a building that is held for investment) may qualify for nonrecognition under IRC Section 1031, if the relinquished property and the replacement property belong to the same general asset class.See Treas. Reg. §1.1031(a)-2.