“Sec. 1031 [1986 Code].
(a) Nonrecognition of gain or loss from exchanges solely in kind.
In general – No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind which is to beheld either for productive use in a trade or business or for investment.
Exception – This subsection shall not apply to any exchange of (A) Stock in trade or other property held primarily for sale, . . .(D) Interests in a partnership . . .
Requirement that property be identified and that exchange be completed not more than 180 days after transfer of exchanged property: For purposes of this subsection, any property received by the taxpayer shall be treated as property which is not like-kind 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
(i) the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or
(ii) the due date (determined with regard to extension) for the transferor’s return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs . . .”
In other words, the following requirements must be met in order for the property to qualify for Section 1031 non-recognition treatment:
The properties, both transferred (the downleg) and received (the upleg) must be like-kind (for example, both must be real property); Both properties must be held for use in a trade or business or for investment and not primarily for sale; Both must be tangible (real or personal) property; It must be an exchange, not a sale and reinvestment; The taxpayer must demonstrate an intent to exchange; and If the exchange is not simultaneous, the taxpayer must meet certain time frames for identifying the upleg property and closing escrow. These time frames will be strictly enforced. (See Question 3.)
It is also important that the taxpayer does not have constructive or actual receipt of money, cash equivalent, or any non-qualifying property or have the unrestricted right to direct the escrow proceeds. This warning also extends to the taxpayer’s agent. For this reason, some sort of “qualified intermediary” should be used to act on behalf of the exchangor in a delayed exchange. There are strict rules as to identification and receipt of property. (See Question 4 for rules as to identification of the upleg property.) If the various rules are not properly followed, the whole transaction could become currently taxable.