Chapter § 55.1 INTRODUCTORY COMMENT

• Jurisdiction: Oregon

§ 55.1 INTRODUCTORY COMMENT

§ 55.1-1 Requirements for Nonrecognition

Section 1031 of the internal Revenue Code is an exception to the general rule (IRC § 1001(c)) that gain must be recognized on the sale or other disposition of property. Section 1031(a)(1) provides that no gain or loss will be recognized on the exchange of property held in a trade or business or held for investment if the property is exchanged for like-kind property that will be held in a trade or business or held for investment. The mandatory nature of the rule means section 1031 will apply when its requirements are met, even if a sale of the property would have generated a loss. United States v. Vardine, 305 F2d 60, 65-66 (2d Cir 1962). The general requirements for a section 1031 exchange are as follows:

(1) Qualified property. Both the property transferred and the property received in a tax-free exchange must be held for investment or for productive use in a trade or business. IRC § 1031(a)(1). Section 1031(a)(2) excludes certain property from qualifying for exchange treatment, including stocks, bonds, notes, securities, and partnership interests.

(2) Like kind. The property transferred and the property received must be of "like kind" to each other for the exchange to be nontaxable. IRC § 1031(a)(1). See § 55.3 to § 55.3-2(j) for a full discussion.

(3) Exchange. There must be an exchange, but an exchange can be either simultaneous or deferred. A deferred exchange is a legal fiction applied to a cash sale of the relinquished property if the sale agreement is assigned to an accommodator acting in accordance with an exchange agreement. The accommodator uses the sale proceeds to purchase replacement property. See Treas Reg § 1.1031(k)-1(a).

(4) Boot treatment. If any of the property received is not-qualified property or is not of like kind to the relinquished property, the property received is treated as "boot." The receipt of boot will not disqualify an exchange, but the boot will be taxable to the exchanger to the extent of the gain realized. Treas Reg § 1.1031(b)-1(a). See § 55.5-1 to § 55.5-9 for more discussion of boot.

§ 55.1-2 Parties and Common Terms Defined

(1) Accommodator: an entity that serves as an intermediary in accomplishing a tax-free exchange. The accommodator can be a seller, buyer, contractor, or developer. Most accommodators are corporations whose only function is to act as intermediaries in tax-free exchanges. Unless otherwise noted, this discussion assumes that an...