Like-Kind Exchange (Section 1031)

Detailed Explanation

A Section 1031 like-kind exchange defers capital gain recognition (and depreciation recapture) when investment or business real property is exchanged for other real property of like kind. Since the Tax Cuts and Jobs Act of 2017, Section 1031 applies only to real property; personal property exchanges no longer qualify. The mechanics: the taxpayer sells "relinquished property" through a Qualified Intermediary (QI) who holds the proceeds, then identifies and acquires "replacement property" within strict timelines. Day 1 is the closing date on the relinquished property. Day 45 is the deadline to identify the replacement property in writing to the QI (using one of three rules: 3-property rule for up to 3 properties, 200% rule for any number of properties whose total fair market value does not exceed 200% of the relinquished property's value, or 95% rule which requires actually acquiring 95% by value of all identified properties). Day 180 is the deadline to close on the replacement property (or the tax return due date, whichever is earlier; this is why selling in Q4 typically requires extending the return to Form 4868 to preserve full 180 days). "Boot" (cash, debt relief net of new debt, or non-like-kind property received) is taxable in the year of the exchange to the extent of realized gain. The taxpayer's basis in the new property equals the basis in the old property plus boot recognized. The taxpayer must remain the same legal entity throughout (no shifting from individual to LLC mid-exchange unless the LLC is a disregarded entity). Form 8824 reports the exchange. Reverse exchanges (parking the new property before selling the old one) and improvement exchanges (using exchange proceeds to improve the replacement property) add complexity and require an Exchange Accommodation Titleholder (EAT) under Rev. Proc. 2000-37.