Like-Kind
Exchange Handbook-
What Real
Estate Owners and Their Advisors Need to Know
Appendix B-Definitions.
Boot. Money or other property, other than like-kind or qualifying property, received or given by the Exchangor in the exchange.
Code. The Internal Revenue Code of 1986, as amended from time to time.
Dealer Property. Synonymous with “Stock in Trade”, as further defined below, or “Inventory”, the sale of which does not qualify for non-recognition treatment but which results in ordinary income.
Deferred Exchange. An exchange in which the Replacement Property is acquired after the sale of the Relinquished Property and requires the use of an Intermediary of Escrow Agent. Also referred to as a Starker Exchange.
Exchange Accommodation Titleholder of EAT. Person, other than the Exchangor, which takes title to the Replacement Property prior to the sale of the Relinquished Property in a Reverse-Starker exchange or which takes title to the Replacement Property subsequent to the sale of the Relinquished Property in a deferred or Starker Exchange in which the EAT is to contract for the construction of the improvements to the Replacement Property.
Exchange Facilitator. Synonymous with “Facilitator”, “Intermediary”, and “Qualified Intermediary”. Treas. Regs. Section 1.1031(k)-1(g)(4)(ii) sets forth the guidelines for determining who can serve as the “Qualified Intermediary” in a like-kind exchange. Generally, any unrelated party who is not an agent of the Exchangor can serve as an intermediary. There are special rules governing when an attorney or his law firm can serve as an Intermediary but generally if the attorney has not provide legal services to the Exchangor within the two years prior to the exchange, the attorney can serve as the Intermediary and can provide legal services related to the disposition of the Relinquished Property and acquisition of the Replacement Property.
Exchange Period. With a Starker Exchange, the period beginning on the date of the sale of the Relinquished Property and ending on the earliest to occur of (a) the end of the 45th day after the sale of the Relinquished Property, if no Replacement Properties have been designated; (b) the date after the end of the Identification Period on which all of the properly designated Replacement Properties have been received by the Exchangor; (c) the date on which all of the Exchange Funds have been used for the acquisition of properly designated Replacement Property or (d) the end of the 180th day after the date of the sale of the Relinquished Property; or (e) the due date for the filing of the Exchangor’s income tax return for the year of the sale of the Relinquished Property, taking into consideration properly filed extension requests. With a Reverse-Starker Exchange, the period beginning on the date the qualified indicia of ownership of the first Replacement Property is conveyed to the Exchange Accommodation Titleholder and ending on the earliest to occur of (a) the end of the 45th day after the acquisition of the Replacement Property by the EAT, if no Relinquished Properties have been designated, (b) the date on which all Replacement Properties have been conveyed to Exchangor and (b) the 180th day after the date on which the qualified indicia of ownership of the first Replacement Property is conveyed to the EAT.
Exchangor. The party who would like to exchange the Relinquished Property for the Replacement Property in the exchange.
Facilitator. See definition of Exchange Facilitator.
Held for Productive Use in Trade or Business. While this term is not defined in the Code or the Regulations, it is generally believed that this term is synonymous with term “used in trade or business” found in Sections 167 and 1231 of the Code. A minimal amount of personal use will not disqualify property from being trade or business or investment property. Priv. Ltr. Rul. 8103117. The Exchangor’s purpose for holding the property is determined when the exchange takes place. Fred S. Wagensen, 74 T.C. 653 (1980). The Exchangor’s purpose for holding the property may change while the property is being held. Rev. Rul. 57-244. The determination of whether the property has been held for a proper purpose is a question of fact. Gulf Stream Land and Development Corp., 71 T.C. 587.
Held for Investment. Unproductive real estate which is held by a non-dealer for future use or future realization of the increase in value is held for investment. Treas. Regs. Section 1.1031(a)-1(b).
Intermediary. See definition for Exchange Facilitator.
Like-Kind. The term “Like-Kind” has reference to the nature and character of the property and not to its grade or quality. Treas. Regs. Section 1031(a)-1(b). The fact that real property is improved or unimproved relates only to its grade or quality and not to its kind or class. Whether property is real or personal is determined by state law. Aquilino v. U.S., 363 U.S. 509 (1960). The following have been held like-kind:
- a leasehold with 30 years or more to run is like-kind with real estate in fee. Treas. Regs. Section 1.1031(a)-1(c)(2);
- vacant land is like-kind with improved real estate;
- a tenancy in common is like-kind with a fee interest;
- one property is like-kind with more than one property;
- trade or business property is like-kind with investment property;
- an interest in a single-member limited liability company which owns real estate is like-kind with a fee interest (please note that while a single member limited liability company is company is disregarded by the IRS, a partnership interest or common stock is not considered like-kind with any interest in real estate); and
- an apartment building is like-kind with an office building.
Other Property Held Primarily for Sale. Broader than the definition of Stock in Trade, it includes any property held for sale, not just property held as stock in trade for sale to customers in the ordinary course of business. Whether property is “held primarily for sale” is a question of fact. If the Exchangor has entered into a contract to sell the Replacement Property before acquiring the property in the exchange, that property would be deemed held “primarily for sale”. Griffin v. Commissioner, 49 T.C. 253 (1967).
Qualified Intermediary. See definition of Exchange Facilitator.
Regulations. The Treasury Regulations promulgated under the Code.
Relinquished Property. The property originally owned by the Exchangor and which the Exchangor would like to dispose of in the exchange.
Replacement Property. The new property which the Exchangor would like to acquire in the exchange.
Reverse Starker Exchange or Reverse Exchange. A like-kind exchange pursuant to which a Replacement Property is acquired prior to the sale of the Relinquished Property.
Starker Exchange. See the definition of Deferred Exchange, also referred to as “Forward Exchange”.
Stock in Trade. Property which would be included in the inventory of a dealer of that type of property. Real property held as inventory does not qualify for non-recognition treatment under Section 1031(a). Land Dynamics (1978) 37 CCH T.C.M. 1119, 47 P-H T.C.M. Paragraph 78,259. A dealer who segregates property, however, may hold such segregated property for productive use in trade or business or for investment. Margolis v. Commissioner, 337 F. 2d 1001 (9th Cir. 1964). The factors to be considered in determining whether property is “stock in trade” are as follows:
- the purpose for which the property was originally acquired;
- the purpose for which the property was subsequently held;
- the extent to which improvements, if any, were made to the property by the Exchangor;
- the frequency, number, and continuity of sales by the Exchangor;
- the extent and nature of the transaction involved;
- the ordinary business of the Exchangor;
- the extent of advertising, promotion, or other active efforts used in soliciting buyers for the sale of the property;
- the listing of the property with brokers; and
- the purpose for which the property was held at the time of sale.