Use of a QI in Sec. 1031 LKEs.

• Author: Ochsenschlager, Thomas P.
• Position: Qualified intermediary - Like-kind exchanges

Often, the substance of a transaction, rather than its form, determines whether a like-kind exchange (LKE) qualifies under Sec. 1031.

Related-Party Exchanges

In Rev. Rul. 2002-83, a taxpayer failed to boost his property basis, for a later sale, by using a qualified intermediary (QI) to facilitate a Sec. 1031 LKE with a related party.

Example: A owns Property 1 with a $50 basis and a $150 fair market value (FMV) that he would like to sell to C. A sale to C would trigger $100 gain. To avoid this, A seeks to increase his basis by transferring Property 1 to a QI, from whom C buys the property for $150. B, A's relative, owns Property 2, with a $150 basis and a $150 FMV. B transfers Property 2 to the QI for $150 cash. The QI then transfers Property 2 to A (see Exhibit on p. 79).

Generally, Sec. 1031(a) provides that no gain or loss is recognized on an exchange of property held for productive use in a trade or business or for investment, if the property is exchanged solely for like-kind property to be held for the same purpose. Under Sec. 1031(d), the basis of property acquired in a Sec. 1031 exchange is the same as the basis of the property exchanged, decreased by any money the taxpayer receives, and increased by any gain the taxpayer recognizes.

Under Sec. 1031(a)(3), the property that the taxpayer will receive in the exchange must be (1) identified within 45 days after the transfer of the property relinquished in the exchange and (2) received by the earlier of 180 days after the transfer of the relinquished property or the due date of the transferor's return for the tax year in which the relinquished property is transferred.

For related parties, Sec. 1031(f)(1) provides that a taxpayer exchanging like-kind property with a related person (defined in Secs. 267(b) and 707(b)(1)) could not use the Sec. 1031 nonrecognition provisions if, within two years of the date of the last transfer, either the related person disposes of the relinquished property or the taxpayer disposes of the replacement property. The Sec. 1031 (f)(4) legislative history provides that if a taxpayer "transfers property to an unrelated party who then exchanges the...