713 / What is the tax basis of property received in a tax-free (or partially tax-free) like-kind exchange?

Editor’s Note: For tax years beginning after 2017, the nonrecognition treatment provided under IRC Section 1031 is limited to exchanges of real property that is not held primarily for sale.¹ This provision applies to exchanges occurring after December 31, 2017. An exception existed if either: (1) the property involved in the exchange was disposed of on or before December 31, 2017, or (2) the property received in the exchange was received on or before December 31, 2017.² The new rules also provide that real property located within the U.S. and foreign real property are not of a like-kind.³

The tax basis of like-kind property received in a tax-free (or partially tax-free) like-kind exchange is generally equal to the adjusted tax basis of the like-kind property given. There are, however, two exceptions. First, if an individual transfers cash or nonlike-kind property or assumes a liability of the other party to the exchange (i.e., the transferee) that exceeds the liabilities (if any) assumed by the transferee, the individual’s tax basis in the like-kind property received is equal to his adjusted tax basis in the property given increased by the sum of (1) the amount of cash and the fair market value of nonlike-kind property given and (2) the net liability assumed.

Second, if liabilities assumed by the transferee exceed the liabilities (if any) assumed by the individual (transferor) and no other cash or boot is transferred by the individual, the individual’s tax basis in the like-kind property he receives is equal to his adjusted tax basis in the like-kind property given decreased by the net amount of liabilities assumed by the transferee.⁴

The tax basis of any nonlike-kind property received in a like-kind exchange is the fair market value of the nonlike-kind property on the date of the exchange.⁵

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1. IRC § 1031(a)(1).