What remains
Like-kind exchange treatment allows gain on the disposition of property to be deferred where the proceeds are reinvested in replacement property of like kind. Since the 2017 legislation it applies to real property held for productive use in a trade or business or for investment, and to nothing else.
Exchanges of personal property were eliminated. Equipment, vehicles, artwork and collectibles no longer qualify, and arrangements built on the older rules do not survive by inertia.
Within real property, the like-kind requirement is generous. Raw land can be exchanged for an apartment building, an office for a warehouse. What matters is the character of the holding, not its type: property held for investment, exchanged for property held for investment.
The two periods, and why they are not sequential
Two deadlines run from the date the relinquished property is transferred. Replacement property must be identified within forty-five days, and the exchange must be completed within one hundred and eighty days.
They run concurrently. The one hundred and eighty days is not a further period after the forty-five; it includes it. A taxpayer who identifies on day forty-five has one hundred and thirty-five days remaining, not one hundred and eighty.
Identification must be in writing, signed, delivered to a party involved in the exchange who is not the taxpayer or a disqualified person, and specific enough to identify the property unambiguously. The usual conventions permit identifying up to three properties without regard to value, or any number whose combined value does not exceed twice the value of the relinquished property.
The proceeds cannot be touched
Actual or constructive receipt of the proceeds defeats the exchange. This is why a qualified intermediary is used: the funds go to the intermediary rather than the seller, and the seller never has the right to call for them.
A disqualified person cannot serve. That category includes the taxpayer's agent, and an accountant, attorney or broker who has acted for the taxpayer within the preceding two years is generally caught. Appointing the long-standing family lawyer as intermediary is a recognized way to lose the exchange.
Boot, and the debt nobody replaced
Deferral is complete only where all proceeds are reinvested and the replacement property carries debt at least equal to the relinquished property's. Anything received that is not like-kind property is boot, and it is taxable to the extent of gain.
| What happened | Result |
|---|---|
| Cash taken out of the exchange | Taxable to the extent of realized gain |
| Replacement debt lower than relinquished debt | The reduction is treated as boot, even though no cash was received |
| Replacement property worth less than the relinquished | The shortfall is boot |
| Personal property acquired alongside the real property | Not like-kind since 2017; treated separately |
What deferral is, and is not
Basis carries over into the replacement property, reduced by the deferred gain. The gain has not been forgiven, it has been moved. Each successive exchange compounds the embedded gain and the eventual taxable sale grows accordingly.
Two further points belong in the arithmetic and are frequently omitted. Depreciation on the replacement property is constrained by the carried-over basis rather than the purchase price, so the annual deduction is smaller than an outright purchase would produce. And several states do not conform, or impose clawback and reporting regimes where property is exchanged out of the state, which can produce a state tax on a federally deferred gain.
General information only. This article describes law and practice as we understand them at the time of writing. It is not tax, legal, accounting, or investment advice, it does not consider your circumstances, and it does not create an advisor-client or attorney-client relationship. Odyssey Strategic Advisors LLC is not a law firm and is not a CPA firm. Confirm any position with your own tax professional before acting on it. See our disclosures.