There are several requirements that must be satisfied for an exchange to qualify as a like-kind exchange. First, there must be an “exchange.” Second, the property exchanged must be:
(1) property held for investment or for productive use in the taxpayer’s trade or business; and
(2) like-kind property (Code Section 1031(a)(1)).
For exchanges after 2017, the Tax Cuts and Jobs Act of 2017 (TCJA) amended Code Section 1031 to provide that the like-kind exchange rules apply only to exchanges of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of a like kind which is to be held either for productive use in a trade or business or for investment (Code Section 1031(a)). Thus, effective January 1, 2018, exchanges of machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property and intangible business assets generally do not qualify for non-recognition of gain or loss as like-kind exchanges. However, certain exchanges of mutual ditch, reservoir or irrigation stock are still eligible for non-recognition of gain or loss as like-kind exchanges (General Explanation of Publication L. 115-97, footnote 926).
Exchange Requirement: Central to a like-kind exchange under Code Section 1031, is the requirement that an exchange has taken place. The essence of an exchange is that a transfer of property between owners has taken place; while the mark of a sale is the receipt of cash for the property (Carlton v. United States, 385 Federal 2d 238 (5th Circuit 1967)). A corollary of the requirement of a reciprocal transfer of property between owners is that the taxpayer not have owned the property purportedly received in the exchange before the exchange occurs; if he has, he has engaged in a nonreciprocal exchange with himself. A taxpayer cannot engage in an exchange with himself because an exchange ordinarily requires a reciprocal transfer of property, as distinguished from a transfer of property for money consideration (DeCleene v. Commissioner, 115 Tax Court 457 (2000)).
In Estate of Bartell v. Commissioner, 147 Tax Court Number 5 (2016), non-acquiesce actions on decisions 2017-06, the Tax Court noted that different tests may be employed by the IRS and taxpayers to arrive at different results as to whether a taxpayer “owned” the replacement property received in the exchange and, thus, whether an exchange has occurred. In Bartell, which involved a reverse like-kind exchange transaction and the use of an exchange accommodation titleholder (EAT), the IRS advocated applying a benefits and burdens analysis as the traditional test in determining tax ownership of property. The IRS argued that, on this basis, the taxpayer – and not the Exchange accommodation titleholder – was the owner of the replacement property at the time of the exchange and, thus, there was no exchange. On the other hand, the taxpayer in Bartell claimed that an agency analysis was the appropriate standard in determining ownership and, under that standard, the Exchange accommodation titleholder was the owner of the replacement property. The Tax Court, citing Alderson v. Commissioner, 2012 PTC 206 (9th Circuit 2012), sided with the taxpayer. According to the Tax Court, where a Code Section 1031 exchange is contemplated from the outset and a third-party exchange facilitator, rather than the taxpayer, takes title to the replacement property before the exchange, the exchange facilitator need not assume the benefits and burdens of ownership of the replacement property in order to be treated as its owner for Code Section 1031 purposes before the exchange.
In actions on decisions 2017-06, there was issued a nonacquiescence in Bartell relating to the holding that a taxpayer’s sale and acquisition of business property qualifies as a like-kind exchange under Code Section 1031 even though 17 months before the purported exchange, an accommodating party facilitating the transaction acquired title to the replacement property and the taxpayer acquired the benefits and burdens of ownership of the property.
Tax Tip:
In Revenue Procedure 2000-37, effective for qualified exchange accommodation arrangements entered into by an Exchange accommodation titleholder on or after September 15, 2000, the IRS said it would not challenge the treatment of an Exchange accommodation titleholder as the beneficial owner of replacement property if certain requirements are met, including certain time limits for finalizing the transaction.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
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(Updated 03/19/2021 08:05)