Applicability of sec. 1031 in exchange of agreements.

• Author: Fountain, Jacqueline

A business might have many reasons to dispose of one or more of its assets and replace those assets with different but similar assets. This exchange of assets is frequently done by selling off assets and then purchasing others; however, this method of exchanging property may be inadvisable because of the possible taxable gain it could generate. A common business practice for avoiding that taxable gain is to engage in what is known as a Sec. 1031 exchange.

Sec. 1031 Exchange

A Sec. 1031 exchange, otherwise known as a 1031 exchange or like-kind exchange, occurs if, within 180 days, an asset being relinquished is replaced (i.e., exchanged) with an asset of like kind. Under Sec. 1031(a)(1), no gain or loss is recognized in this type of exchange and, therefore, it is not a taxable event. Instead, the basis of the newly acquired asset is adjusted to the amount of the basis of the relinquished property, decreased by any money the taxpayer might have received as well as by the amount of gain or loss that was created by the exchange. For purposes of this type of exchange, like-kind refers to the nature, character, or class of the property being exchanged but not necessarily to the grade or quality of the properly. An example of a 1031 transaction would be the exchange of one rental building for another rental building.

Intangible Sec. 1031 Exchange

While 1031 exchanges are commonly done with tangible property, this Code section also applies to certain types of intangible property. The 1031 exchange rules for intangible property are slightly different from those for tangible property. Regs. Sec. 1.1031(a)-2(c)(l) provides that for intangible property, the nature or character of the rights to the property are considered, as well as the nature or character of the underlying property to which that intangible property relates. Regs. Sec. 1.1031(a)-2(c)(3) provides two examples that explain the distinction: (1) The taxpayer exchanges the copyright on one novel for the...