Like-Kind Exchanges, Involuntary Conversions, and Installment Sales

What does §1031 allow taxpayers to do?

Exchange real property used in business/investment for other like-kind real property without recognizing gain immediately.

After 2017, what type of property qualifies for like-kind exchange?

Only real property. Personal property no longer qualifies.

What does “like-kind” mean for real property?

Properties of the same nature or character, even if different quality (e.g., land for an office building).

What happens if a taxpayer receives “boot”?

Gain must be recognized to the extent of the boot (cash or non-like-kind property).
Losses are never recognized in §1031 exchanges.

What are key requirements for a delayed (non-simultaneous) exchange?

Must identify replacement property within 45 days and receive it within 180 days, usually through a qualified intermediary.

What is the taxpayer’s basis in the replacement property?

Carryover basis from the relinquished property, adjusted for boot and gain recognized.

What is an involuntary conversion?

Property destroyed, stolen, condemned, or disposed of involuntarily, and the taxpayer receives compensation.

How can gain be deferred under §1033?

By reinvesting the proceeds into qualified replacement property.

What type of replacement property is required?

Must be similar or related in service or use to the property converted (stricter than §1031).

What are the replacement time periods?

Generally:

• 2 years for destruction/theft

• 3 years for government condemnation
  (Some special cases allow longer.)

When must gain be recognized?

If the taxpayer does not reinvest or reinvests less than the amount received.

Can the taxpayer receive the insurance/compensation directly?

Yes. Unlike §1031, no qualified intermediary is required.

What is an installment sale?

A sale where at least one payment is received after the tax year of the sale.

What method is used to report gain?

The installment method: report gain as payments are received.

What items make up each payment?

1. Return of basis (nontaxable)

2. Gain (taxable portion)

3. Interest (taxable as ordinary income)

What properties do NOT qualify for installment method?

• Inventory

• Dealer property

• Publicly traded stock/securities

Can losses be reported via the installment method?

No. Loss must be recognized fully in the year of sale.

What form reports installment sales?

Form 6252.

Can a taxpayer elect out of the installment method?

Yes — they can recognize all gain in year of sale if they choose

What happens in related-party installment sales?

If the buyer resells before all payments are made, the seller may have to accelerate gain recognition.

Which code section applies to voluntary swaps of property?

§1031 Like-Kind Exchange

Which applies when property is destroyed or condemned?

§1033 Involuntary Conversion

Which applies when payments are received over time?

§453 Installment Sales

Which allows recognition of gain only to extent of cash received?

Both §1031 (boot) and §1033 (not fully reinvested).

Which carries over basis to new property?

§1031 and §1033 (carryover basis rules).

Which spreads gain over multiple years?

Installment sales (§453).

Taxpayers exhanging one piece of property for another haven’t changes their relative ____

economic position

For an exchange to qualify as a like-kind exchange for tax purposes, the transaction must meet the following three criteria:

Real property is exhanged solely for like-kind property

both the real property given up and the real property received in the exhange by the taxpayer are and will be either “used in a trade or business” or “held for investment” by the taxpayer

The exhange must meet certain time restrictions

Taxpayers must identify replacement like-kind property within ____ days of giving up their real property.

45

Like-kind property must be received within ____ days of when the taxpayer transfers real property in a like-kind exchange.

180

Boot is

non-like-kind property

Gains from installment sales are calculated as follows:

Gross profit percentage = Gross profit/Contract price

Gain recognized = Gross profit percentage × Principal payment received in the year