Nonsimultaneous Tax Deferred Exchanges: the Confusion Continues
| Publication year | 1985 |
| Pages | 975 |
| Citation | Vol. 14 No. 6 Pg. 975 |
1985, June, Pg. 975. Nonsimultaneous Tax Deferred Exchanges: The Confusion Continues
During recent years, there has been some confusion surrounding the tax treatment of nonsimultaneous exchanges of real property. The statutory provisions governing such exchanges were so broadly drafted that they lent themselves to creative interpretation by both taxpayers and the Internal Revenue Service ("Service").(fn1) In addition, faced with the legitimate (but diametrically opposed) positions of taxpayers and the Service, courts have been able to provide little guidance as to the boundaries of the various statutory provisions.
In an effort to begin to clarify the area, Congress recently amended § 1031 (a) of the Internal Revenue Code ("Code") to sanction nonsimultaneous or delayed exchanges under certain circumstances.(fn2) Although the amendment establishes parameters as to the timing required for nonsimultaneous exchanges, it does not address other problematic issues encountered in such exchanges. This article summarizes the general tax provisions encountered in nonsimultaneous exchanges, the provisions of the amendment and some of the remaining issues.
Generally, the Code provides that any sale or exchange of property resulting in gain or loss gives rise to a taxable transaction. However, § 1031 creates an exception to this general rule by providing that no gain or loss is to be recognized if property held for productive use in a taxpayer's trade or business or for investment purposes is exchanged solely for property of a like kind that is also to be held by the taxpayer for productive use in his trade or business or for investment purposes. Unfortunately, neither § 1031, the legislative history of the section, nor the underlying regulations addressed the issue of whether the "exchange" had to be simultaneous to qualify for the tax deferral benefits of such section.
After five years of relatively unsuccessful attempts to superimpose a simultaneity requirement on § 1031 through the judicial process,(fn3) the U.S. Treasury Department approached Congress to limit or prohibit nonsimultaneous exchanges. As part of the Tax Reform Act of 1984, Congress amended § 1031 to allow tax deferred treatment for nonsimultaneous exchanges if two criteria are satisfied:
1) The property to be received in the exchange must be identified before the date which is forty-five days after the date on which the taxpayer relinquished property in the exchange;(fn4) and
2) The identified property must be received prior to the earlier of: (a) 180 days after the date on which the taxpayer transfers the property relinquished in the exchange; or (b) The due date (including extensions) for the taxpayer's tax return for the taxable year in which the transfer of the relinquished property occurs.(fn5)
Failure to identify the exchange property during the "identification period" or to receive the property within the "closing period" causes the exchange property to be treated as non-like-kind property.(fn6) Receipt of such non-like-kind property in most cases subjects the entire transaction to current taxation under the general provisions of the Code.
As could be expected, there are many issues yet to be resolved in respect to both the identification period and the closing period. Since the exchange property must be identified before the day which is forty-five days after the date the taxpayer transfers the property relinquished in the exchange, the amendment clearly establishes a forty-four-day identification period. However, the statute does not specify the means for identifying the exchange property. The Conference Committee Report states that the...
To continue reading
Request your trial