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Like-Kind Exchange Transactions – What You Need to Know:

Under the Tax Cuts and Jobs Act, Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange. A transition rule in the new law provides that Section 1031 applies to a qualifying exchange of personal or intangible property if the taxpayer disposed of the exchanged property on or before December 31, 2017 or received replacement property on or before that date. 

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.

  • If, as part of the exchange, you also receive other (not like-kind) property or money, you must recognize a gain to the extent of the other property and money received. You can’t recognize a loss.

According to IRC Section 1031, taxpayers can potentially postpone paying tax on that gain if the proceeds are reinvested in a similar property as part of a qualifying like-kind exchange. Additionally, realized losses are not recognized in a like-kind exchange. Losses are deferred and increases the basis in the new property. 

When boot is received gain will be recognized as the lesser of boot received or the realized gain. Boot can be recognized as: 

  • Cash received
  • FMV of property received
  • Cancellation of debt 

When boot is not received gain recognized will always be zero. The logic is that zero dollars will always be a lesser amount than any positive amount realized. 

Boot offsetting rules –taxpayer’s will only be subject to tax on the net boot received. In some transactions, boot might be both paid and received by each taxpayer. In which case, boot may not be recognized (or partially recognition) if it is offset. The offsetting rules that you should be familiar for CPA exam purposes are as follows:

For CPA exam purposes there are four calculations that you should understand. We have broken out the calculation for realized gains or losses, recognized gains or losses, and basis in the below “mental map”.

A like-kind exchange is a type of transaction that may allow for the taxpayer to defer taxable gains or avoid taxable gains altogether. The visual below illustrates the different aspects of like-kind exchanges to consider and how to calculate each aspect.

Below is a multiple-choice question provided by Universal CPA Review:

Leo exchanged an asset used for business purposes for a very similar asset which will be used to replace his exchanged asset. The property that Leo relinquished had a fair value of $500,000 and a basis of $400,000 in exchange for property that has a fair value of $525,000 and a basis of $450,000. In addition, Leo gave cash of $25,000.

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