An exchange of property, like a sale, generally results in the current recognition of gain or loss. Section 1031(a) provides an exception to this general rule. Under Section 1031(a), no gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of like-kind that is to be held either for productive use in a trade or business or for investment. Section 1031(a) specifically does not apply to exchanges of stock in trade or other property held primarily for sale, stocks, bonds, notes, other securities or evidences of indebtedness or interest, certificates of trust or beneficial interest, choses in action, or interests in a partnership.

Section 1031(a)(3) was added by Section 77 of the Tax Reform Act of 1984. Section 1031(a)(3) provides that any property received by the taxpayer in a deferred exchange is treated as property which is not likekind property if (a) such property is not identified as property to be received in the exchange on or before the day which is 45 days after the date on which the taxpayer transfers the property relinquished in the exchange, or (b) such property is received after the earlier of (1) the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or (2) the due date (including extensions) of the taxpayer's tax return for the taxable year in which the transfer of the relinquished property occurs.  

Section 1031 does not define either the term "productive use in a trade or business" or "for investment". The Treasury Regulations provide that otherwise unproductive property held by a "non-dealer" for future trade or business use or for future appreciation constitutes property held for investment. The relevant qualified use is the use of each property in the Taxpayer's hands. The use of property in the hands of the purchaser of relinquished property or the seller of replacement property is irrelevant.

Qualifying property must be used in a trade or business in which the Taxpayer is engaged. The test is applied at the time of the exchange without regard to the Taxpayer's motive prior to the exchange.

The language of Section 1031(a) states that an exchange of like-kind property will qualify provided the property received is "to be held for" productive use or investment. This reflects the continuity of ownership concept underlying nontaxable exchanges. (Reg. 1.10021(c)). How long the replacement property must be held by the Taxpayer is uncertain. Depending on the facts and circumstances, the Service may construe subsequent dispositions, taxable or nontaxable, as evidence that the property was not acquired "to be held" so that the initial exchange would be taxable.

All property classified as realty under state law is "like-kind".

Like-kind refers to the nature or character of the property, not to its grade or quality. The fact that the real estate is improved or unimproved is immaterial. The non-recognition rules of Section 1031 concern the dichotomy between realty and personalty rather than real estate which has dissimilar locations, characteristics or profit-producing uses.

Improved real estate may be exchanged for unimproved real estate, and city real estate may be exchanged for rural real estate. Mineral and non-mineral real property interests are like-kind to each other provided the mineral interests are considered real property under applicable state law. A leasehold interest of at least 30 years duration (including optional renewal periods) is like-kind to a fee interest.

The essence of an exchange is a reciprocal transfer of properties as distinguished from a sale for cash followed by a reinvestment into replacement property. The Service originally took the position that the reciprocal transfer of property must be simultaneous. Under this view, a transfer of like-kind property today for property to be received in the future would not constitute an exchange.

In Starker v. U.S. 1975-1 USTC 8443 (D. Oregon 1975), the Ninth Circuit Court rejected this position. The Tax Reform Act of 1984 attempted to provide more certainty in the area of delayed exchanges by implementing the 45-day Identification Period and the 180-day Exchange Period.

A limited number of properties must be designated as the property to be received in the exchange within 45 days from the date Taxpayer surrenders control of the relinquished property.

The requirement in Code §1031(a)(3)(A) that the exchange property be identified within 45 days after the date on which Taxpayer transfers the property relinquished in the exchange is an arbitrary cut-off date which presumably must be strictly complied with.

Replacement property must actually be received within 180 days of the date Taxpayer surrenders control of the relinquished property or the date (including extensions) his tax return is due for the year in which the relinquished property is surrendered, whichever comes first.

Thus, for exchanges beginning on or after October 17 (assuming a calendar year Taxpayer and a non-leap year) the filing deadline of the income tax return due April 15 of the following year will have to be extended in order to avoid shortening the 180 day period allowed for completing the exchange.

Any asset held for productive use in a trade or business, or held for investment, may be exchanged for a like-kind asset that will also be held for productive use in a trade or business, or held for investment.

Examples include, but are not limited to the following:

Real Estate
All real estate is like-kind to any other real estate, regardless of its grade or quality

Leaseholds
Existing leaseholds with 30 or more years to run, including extensions

Personal property that falls within the same NAICS Code or one of the General Asset Classes, such as:

• Aircraft
• Marine Vessels
• Trucks
• Automobile fleets
• Railroad rolling stock
• Equipment used in mining, farming, drilling, road building, printing or construction
• Livestock
• Racecars
• Musical instruments
• Collectibles, such as artwork, noncurrency coins, rugs, antiques, baseball cards

Intangible personal property such as:

• FCC licenses
• Franchise rights
• Taxi medallions
• Emission allowances or mitigation credits

Assets excluded from 1031 treatment are listed by the IRS as:

• Stock in trade or other property held primarily for sale
• Stocks, Bonds, or Notes
• Other securities or evidence of indebtedness or interest
• Interests in a Partnership
• Certificate of Trust or Beneficial Interest
• Choses in action

Domestic property may be exchanged for other domestic property of like-kind, and foreign property may be exchanged for other foreign property of like-kind. However, domestic property may not be exchanged for foreign property, even if it is of like-kind.