Chapter § 55.4 EXCHANGE REQUIREMENT

• Jurisdiction: Oregon

§ 55.4 EXCHANGE REQUIREMENT

Internal Revenue Code section 1031 applies only to transactions in which the relinquished property and the replacement property are "exchanged." IRC § 1031(a)(1).

§ 55.4-1 Exchange Defined

The regulations define exchange as follows: "Ordinarily, to constitute an exchange, the transaction must be a reciprocal transfer of property, as distinguished from a transfer of property for a money consideration only." Treas Reg § 1.1002-1(d).

§ 55.4-2 Sale versus Exchange

A sale followed (even immediately) by a separate purchase will be treated as a taxable sale. In Carlton v. United States, 385 F2d 238, 241-42 (5th Cir 1967), the exchanger sold the relinquished property and was assigned the right to purchase the replacement property by the seller. The exchanger completed the purchase of the replacement property. Although the exchanger used the sale proceeds to purchase the replacement property, tax-free exchange status was not allowed. Cf. Allegheny Cnty. Auto Mart, Inc. v. Comm'r, 12 TCM (CCH) 427 (1953), aff'd, 208 F2d 693 (3rd Cir 1953) (sale of relinquished property followed by purchase of replacement property from same party treated as tax-free exchange). A purchase and sale will be deemed a deferred exchange, however, if the statutory requirements are satisfied, including the exchanger's statement of intent in the purchase and sale agreements that the transactions constitute a deferred exchange.

§ 55.4-3 Trade-In Transactions

Many trade-ins are not structured at all. The exchanger merely transfers the relinquished property to a dealer as a sale and executes a separate contract to acquire the replacement property. Despite the lack of "paperwork," such transactions have been treated as exchanges. Redwing Carriers, Inc. v. Tomlinson, 399 F2d 652, 658 (5th Cir 1968); Rev Rul 61-119, 1961-1 CB 395.

§ 55.4-4 Change in Identity of Exchange Parties

In general, if the exchanger enters into an exchange with another party, the identity of either party may not change during the exchange. In a deferred exchange, the identity of both parties should ordinarily be the same during the first and second legs of an exchange. For example, the IRS disallowed an exchange as not being reciprocal, as required by Treasury Regulation section 1.1002-1(d), when a partnership sold the relinquished property and individual partners purchased separate replacement property. Tech Adv Mem 98-18-003 (May 1, 1998). If a majority of the individual partners had purchased...