711 / How is the tax treatment of a like-kind exchange altered if, in addition to like-kind property, the taxpayer also receives cash or nonlike-kind property in the exchange?
Receipt of “boot.” If the taxpayer receives only like-kind property in the exchange, no taxable gain or loss is reported on his income tax return as a result of the exchange regardless of his tax basis in and value of the respective properties.4 However, if in addition to like-kind property, the taxpayer receives cash or other property that is different in kind or class from the property he transferred (i.e., nonlike-kind property is often referred to as “boot”), any gain he realizes in the exchange will be taxable to the extent of the sum of the amount of cash and the fair market value of the nonlike-kind property received; any loss realized in such an exchange may not be taken into account in calculating the taxpayer’s income tax.5
If the taxpayer receives only like-kind property, but transfers cash or other nonlike-kind property as part of the exchange, regulations indicate that the nonrecognition rules apply to the like-kind properties, but not to the “boot.”6
Recapture. In a like-kind exchange where boot is given or received, the recapture provisions applicable to certain depreciable property apply (see Q 716). If property for which an investment credit was taken is exchanged before the investment credit recapture period ends, a percentage will be recaptured (see Q 7893).7
1. IRC § 1031(a)(1).