Certain exchanges of property are not taxable. This means any gain or loss cannot be deducted and the gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Sec. 1031 provides that non-recognition of gain or loss applies in an exchange of property for the same kind of property.
To be a like-kind exchange, the property traded and the property received must be held for productive use in a trade or business or investment. Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. The exchange of real estate for real estate and the exchange of personal property for similar personal property are exchanges of like-kind property.
You must identify the property with 45 days and receive by 180 days after the date you transfer the property given up in the exchange.
The like-kind exchange rules generally do not apply to an exchange in which you acquire replacement property before you transfer relinquished property. However, if you use a qualified exchange accommodation arrangement (QEAA), the transfer may qualify as a like-kind exchange. Under a QEAA, either the replacement property or the relinquished property is transferred to an exchange accommodation titleholder (EAT). You and the EAT must enter into a written agreement no later than 5 business days after the qualified indications of ownership are transferred to the EAT.
Special rules apply to like-kind exchanges between related persons. If either person disposes of the property within 2 years after the exchange, the exchange is disqualified from non-recognition treatment. The gain or loss on the original exchange must be recognized as of the date of the later disposition.
Taxpayers who convert rental property to a principal residence should know that a tax law change may limit their ability to exclude gain on the sale of that residence if they obtained the property through a like-kind exchange. Generally, a taxpayer can exclude up to $250,000 of gain on the sale of a home, provided the individual has owned and used it as a principal residence for two out of the five years before the sale. The exclusion is $500,000 for a married couple if both meet the use test. The American Jobs Creation Act of 2004 does not allow any exclusion if the taxpayer sells the home within 5 years of acquiring the property through a like-kind exchange. The new law applies to sales after 10/22/04.