Now is the time to consider expanded LKE opportunities.

• Author: Szczepaniak, Tony
• Position: Like-kind exchange

Many taxpayers have reviewed Sec. 1031 to consider whether to enter into a like-kind exchange (LKE).With the exception of high value, one-off exchanges involving real estate, airplanes or other "big-ticket" items, the technical complexity and administrative costs of establishing and maintaining a personal property LKE program can potentially outweigh the benefits. However, with an effectively managed, technology-based LKE program, businesses of all sizes can reap the benefits of deferring gain.

Qualifying LKEs

Generally, Sec. 1031 allows taxpayers to sell an asset and defer any associated gain when the proceeds from the sale are used to purchase an asset of similar classification. There are three fundamental rules that must be followed for a transaction to qualify as a LKE:

1. Personal property must be exchanged for personal property, and real property for real property;

2. The exchanged property must be of similar classification; and

3. The exchanged property must be used in a trade or business.

While these guidelines outline the general requirements of defining a transaction as a LKE, several additional regulations refine the LKE rules.

Although the concept of a LKE program is deceptively simple, the statutory and regulatory requirements make this area technically complex. In designing an effective LKE program, it is important to understand the Sec. 1031 regulations that provide detailed guidance on establishing and maintaining a qualified program. In this area of the Code, form matters; missteps, even unintentional ones, may cause individual exchanges to be reversed.

QIs

The most important aspect of an LKE program is the use of a qualified intermediary (QI) in the sales and purchasing process. To qualify, proceeds from an asset sale must be deposited with a QI until such time that a replacement asset is acquired or an associated liability is relieved. In using a QI, an asset owner assigns the rights (but not any associated obligations) to sell the asset to the QI. The QI is paid directly by the purchaser of the asset. The proceeds are then used by the QI to purchase a replacement asset or relieve another obligation.

The proper facilitation of exchanges by these third-party providers ensures that participants in an LKE program are not in actual or constructive receipt of funds. Repetitive LKE relationships with a QI are usually governed by a Master Exchange Agreement, in which a participant assigns future purchase and sale rights to the...