Like-Kind Exchanges: Section 1031 Explained (CPA REG)
Like-Kind Exchanges: Section 1031 Explained (CPA REG)
Section 1031 lets a taxpayer defer gain on qualifying real property exchanges — but only real property qualifies after 2017, boot triggers recognition, and the deferred gain follows the replacement property through a substituted basis. These three mechanics carry almost every §1031 exam question.
Area III · 5–15% Application & Analysis IRC §1031Quick answer: A like-kind exchange under IRC §1031 defers gain or loss when real property held for productive use in a trade or business or for investment is exchanged for like-kind real property. Since the Tax Cuts and Jobs Act, only real property qualifies — personal property and intangibles no longer do. Realised gain is recognised only to the extent of boot received (recognised gain = the lesser of realised gain or boot). Losses are never recognised. The deferred gain is preserved in a substituted basis in the replacement property.
What qualifies as a like-kind exchange
A §1031 exchange requires like-kind real property on both sides, held for productive use in a trade or business or for investment. For real estate, "like-kind" is interpreted broadly: improved property can be exchanged for unimproved, and a rental building for raw land, as long as both are real property held for a qualifying purpose. United States real property is not like-kind to foreign real property. Property held primarily for sale — a dealer's inventory or a flipper's lots — does not qualify, and neither do stocks, bonds, securities, or partnership interests.
What changed in 2018. Before the TCJA, equipment, vehicles, and other tangible personal property could be exchanged tax-deferred. From 2018, §1031 is limited to real property. A candidate who defers gain on a truck-for-truck trade is applying repealed law — a deliberately planted trap on the current exam.
How boot creates recognised gain
Boot is any non-like-kind property received in the exchange — cash, other property, or net relief from a liability. Boot does not disqualify the exchange; it simply forces recognition. The rule is precise: recognised gain equals the lesser of realised gain or boot received. Paying boot never triggers gain, and a realised loss is never recognised, even when the taxpayer receives boot.
Worked example. Meera exchanges investment land (adjusted basis $60,000, fair market value $100,000) for like-kind land worth $90,000 plus $10,000 cash.
· Realised gain = $100,000 − $60,000 = $40,000.
· Boot received = $10,000.
· Recognised gain = lesser of $40,000 or $10,000 = $10,000.
· Deferred gain = $40,000 − $10,000 = $30,000.
Basis of the replacement land = $60,000 basis given up − $10,000 boot received + $10,000 gain recognised = $60,000. Check: replacement fair market value $90,000 − deferred gain $30,000 = $60,000. The $30,000 she did not pay tax on today is baked into the lower basis and will surface when she sells the new land in a taxable transaction.
Basis in the replacement property
The substituted basis is what makes the deferral temporary rather than permanent. Compute it as the adjusted basis of the property given up, plus any gain recognised and any boot paid, minus any boot received and any loss recognised. The shortcut check is the fair market value of the replacement property minus the deferred gain (or plus a deferred loss). Because the deferred gain lives in that lower basis, §1031 postpones tax; it does not forgive it.
Timing and related parties. In a deferred (Starker) exchange the taxpayer has 45 days to identify replacement property and 180 days to receive it, measured from the transfer of the relinquished property — miss either and the deferral fails. If the exchange is with a related party, both sides generally must hold the property for two years, or the deferred gain is triggered retroactively.
Real property only, gain recognised to the extent of boot received, deferred gain carried in a substituted basis. Master those three and add the 45/180-day clock, and §1031 questions become routine.
Frequently asked questions
Can I still do a like-kind exchange on business equipment?
No. Since 2018, §1031 applies only to real property. Exchanges of machinery, vehicles, and other tangible personal property are fully taxable events under current law.
Does receiving boot disqualify the exchange?
No. The exchange still qualifies for deferral; boot only causes gain to be recognised, up to the amount of boot received. The remaining realised gain is deferred.
Can I recognise a loss in a §1031 exchange?
No. Losses are never recognised in a like-kind exchange, even if you receive boot. If you want to claim a loss, you must sell the property in a taxable transaction rather than exchange it.
Is US real estate like-kind to property abroad?
No. Real property located in the United States is not considered like-kind to real property located outside the United States, so a cross-border exchange does not qualify for §1031 deferral.
Surgent CPA Review, available through Eduyush for ₹32,000, drills §1031 boot and basis computations in exam-format simulations — part of 9,000+ MCQs and 500+ simulations, with ReadySCORE showing when your property-transaction topics are exam-ready.
Explore the CPA courseDeciding which state board, review course, or exam order fits your timeline? Talk to the Eduyush team on WhatsApp at +91 96433 08079.
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