Introduction
According to US tax law, a like-kind exchange, sometimes called a 1031 exchange, is a single transaction or a set of transactions that permit the sale of one asset and the purchase of a different replacement asset without creating a current tax obligation on the sale of the original asset. According to Section 1031(a), if the property is exchanged primarily for a property of the same kind that will be maintained for productive use in a business, trade, or investment, no loss or gain must be recognized on the transaction, for instance. This exclusion includes bonds, notes, stocks, trust certificates, and certain other types of property that are not related to the like kind.
Discussion
In the case of Fred S. Wagensen, the court examined several regulations. First, Regulation 48(a)(6) and Section 1.48-1(b)(1) state that an asset is not a section 38 asset unless the taxpayer is entitled to a tax rebate for devaluation with regards to it for the tax year (Legal Information Institute, n.d.). A deductible for depreciation can be authorized if the asset is of the kind covered by section 167’s allowance for depreciation and may recover its basis through a depreciation method (Featherston, 1980). Therefore, cattle will be considered section 38 assets and only be eligible for capital credit if depreciable. The court ruled that the partnership’s inventory covered all property, including breeding cattle. The breeding cattle are not depreciable since their cost was included in the inventory and utilized to calculate profits; as a result, the petitioner is not eligible for an investment deduction for the animals.
The case of Dollie H. Click failed to demonstrate that the homes in which the children and their wives resided were owned for investment reasons or use in commerce or business. Hence they did not comply with section 1031’s rules (Sterrett, 1982). Three conditions must be satisfied to be eligible under section 1031. The trade must be:
- an exchange;
- must include like-kind properties; and
- must keep both the transferred and the received properties for either investment or constructive use or company (Legal Information Institute, n.d.).
They claimed no evidence indicated the petitioner accepted the residences as “exchange” property to make an investment. They did not bother to resolve section 453 since the trade did not fall under section 1031.
In the present case, George and Iowa Corporation does not experience any benefit or loss due to the exchange of assets. In exchange for the FMV, George obtains the homes and gives them to his sons. Therefore, George should complete the transaction since it meets the criteria for a like-kind exchange. In the above example, the homes and the farms belong to the same class. A commodity for one purpose exchanged for another commodity for a different reason does not constitute a like-kind trade, according to section 1031. Thus, the trade does not meet the criteria for a like-kind exchange (Legal Information Institute, n.d.). Like-kind trades are not taxed since either party recognizes a gain or loss. The farm and the house are in class. However, there are two distinct agendas at play. George’s purpose on the farm is business, but his aim on the two houses is to gift them.
Conclusion
George can postpone the like-kind trade, but there are limitations. The first restriction is that he would only have 45 days after selling the property to find suitable replacement properties. George must finish the exchange by 180 days following the sale of the exchanged property (Legal Information Institute, n.d.). Additionally, George and his sons would have to consent to utilize the asset for trade. The deal will nonetheless count as a like-kind trade even if receivables or other gains that are not similar goods are received at its end. Gain could be subject to taxation, however, only to the degree that the proceeds do not consist of similar interests. This would reduce the basis as opposed to if the property had been provided as gifts. As a result, George could get cash in return and then give it to his sons, who might use it to buy real estate for their own purposes.
References
Featherston. (1980). Wagensen v. comm’r of internal revenue. Legal research tools from Casetext. Web.
Legal Information Institute. (n.d.). 26 CFR part 1 – income taxes. Legal Information Institute. Web.
Sterrett. (1982). Click v. comm’r of internal revenue. Legal research tools from Casetext. Web.