Business Tax Preparation · Business assets

Like-kind exchange

The individual side of this section is covered under Part 1. This page is about what changed for businesses in 2018 and what a business has to do afterwards: how a trade-in is now taxed, how recapture survives an exchange, and how the replacement property is depreciated.

The rule

Real property only. real property only — no gain or loss on the exchange of real property held for productive use in a trade or business or for investment, solely for real property of like kind to be so held^TY2026 (IRC § 1031(a)(1)), and Pub. L. 115-97 § 13303(a) substituted "real property" for "property" throughout IRC § 1031(a)(1), and § 13303(b)(5) changed the section catchline to match — so equipment, vehicles, livestock, artwork and intangibles all left the section for exchanges after 2017^TY2026.

Not for a dealer. unavailable for real property held primarily for sale — so a dealer's inventory and a developer's lots are outside the section^TY2026 (IRC § 1031(a)(2)).

The two clocks. 45 days after the transfer of the relinquished property, in an unambiguous written description — a legal description, street address or distinguishable name for real property^TY2026 and the **earlier** of 180 days after the transfer of the relinquished property or the due date, including extensions, of the return for the year of that transfer — so a late-year sale needs an extension to get the full 180 days^TY2026 (IRC § 1031(a)(3)), with three properties without regard to value; or any number whose aggregate value at the end of the identification period does not exceed 200 percent of the relinquished property's value; or, failing both, any identified property actually received amounting to at least 95 percent of the value of everything identified^TY2026 (Reg. § 1.1031(k)-1(c)(4)).

Boot and basis. gain is recognised to the extent of money and the fair market value of other property received, but not more than the realised gain — and a loss is never recognised on an exchange that would otherwise qualify^TY2026 (IRC § 1031(b)), and the basis of the property given up, decreased by money received and increased by gain or decreased by loss recognised — with a liability assumed by the other party, as determined under IRC § 357(d), treated as money received^TY2026 (IRC § 1031(d)) — under which a liability the other party assumes, determined under IRC § 357(d), is money received.

Recapture survives, but is capped. where gain on a disposition is not recognised in whole or in part under IRC § 1031 or § 1033, the IRC § 1245 ordinary income taken into account cannot exceed the gain actually recognised plus the fair market value of any acquired property that is not IRC § 1245 property^TY2026 (IRC § 1245(b)(4)).

Depreciating what comes back. the depreciable exchanged basis is recovered over the remaining recovery period of the relinquished property using its depreciation method, where both the period and the method prescribed for the replacement property are the same; any excess basis is treated as newly placed in service^TY2026 (Reg. § 1.168(i)-6(c)(3)(ii), (d)(1)), and the depreciation treatment and elections of previous owners of the replacement property have no effect on the acquiring taxpayer's depreciation of it^TY2026 (Reg. § 1.168(i)-6(c)(2)).

Partnerships. an interest in a partnership with a valid IRC § 761(a) election out of subchapter K is treated as an interest in each of its assets rather than as a partnership interest^TY2026 (IRC § 1031(e)).

Related persons. nonrecognition is undone where, within 2 years of the last transfer in the exchange, the related person disposes of the property received or the taxpayer disposes of the property they received — the gain being taken into account in the year of that later disposition^TY2026 (IRC § 1031(f)).

Current figures

How it works in practice

A trade-in is now a sale. Pub. L. 115-97 § 13303(a) substituted "real property" for "property" throughout IRC § 1031(a)(1), and § 13303(b)(5) changed the section catchline to match — so equipment, vehicles, livestock, artwork and intangibles all left the section for exchanges after 2017^TY2026. Before 2018 a business trading a truck against a new one deferred the gain; the dealer’s allowance simply reduced the basis of the replacement. Since 2018 the transaction is two transactions: a taxable disposition of the old truck for the trade-in allowance, and a purchase of the new one at its full price.

And the gain on the old one is usually ordinary and usually total. The truck was probably expensed or bonus-depreciated, so its adjusted basis is nil, and IRC § 1245(a)(1) makes the whole trade-in allowance ordinary income. The offsetting relief is that the new truck’s basis is its full price rather than a reduced carryover figure, so the deduction comes back — but a year later and at a different character.

Where a business is genuinely exchanging real property, the mechanics are unchanged. real property only — no gain or loss on the exchange of real property held for productive use in a trade or business or for investment, solely for real property of like kind to be so held^TY2026 (IRC § 1031(a)(1)) — held for productive use in a trade or business or for investment, exchanged for real property to be so held. The like-kind test for real property is famously broad: raw land for an office building, a leasehold of thirty years or more for a fee.

Recapture is not eliminated by an exchange; it is capped. where gain on a disposition is not recognised in whole or in part under IRC § 1031 or § 1033, the IRC § 1245 ordinary income taken into account cannot exceed the gain actually recognised plus the fair market value of any acquired property that is not IRC § 1245 property^TY2026 (IRC § 1245(b)(4)). Where a business exchanges depreciable real property and receives boot, the IRC § 1245 ordinary income cannot exceed the gain actually recognised plus the value of any acquired property that is not IRC § 1245 property. In a pure real property exchange with no boot, nothing is recognised and nothing is recaptured — but the recapture potential carries into the replacement property’s basis and surfaces on a later taxable sale.

The replacement property does not start a new life. the depreciable exchanged basis is recovered over the remaining recovery period of the relinquished property using its depreciation method, where both the period and the method prescribed for the replacement property are the same; any excess basis is treated as newly placed in service^TY2026 (Reg. § 1.168(i)-6(c), (d)). The exchanged basis — the carryover portion — continues over what is left of the relinquished property’s recovery period, using its method. Only the excess basis, being what the taxpayer paid over and above the carryover, is treated as newly placed in service and gets a fresh recovery period.

And the previous owner’s history is irrelevant. the depreciation treatment and elections of previous owners of the replacement property have no effect on the acquiring taxpayer's depreciation of it^TY2026 (Reg. § 1.168(i)-6(c)(2)). What matters is the acquiring taxpayer’s own position: how the relinquished property was being depreciated, and what IRC § 168 would prescribe for the replacement in this taxpayer’s hands. Elections made by the person the property came from do not follow it.

A partnership interest is not real property, with one exception. an interest in a partnership with a valid IRC § 761(a) election out of subchapter K is treated as an interest in each of its assets rather than as a partnership interest^TY2026 (IRC § 1031(e)). An interest in a partnership that has validly elected out of subchapter K under IRC § 761(a) is treated as an interest in each of the underlying assets, so a co-ownership arrangement structured that way can exchange the real property itself. An ordinary partnership interest cannot.

Related-party exchanges unwind on a two-year disposal. nonrecognition is undone where, within 2 years of the last transfer in the exchange, the related person disposes of the property received or the taxpayer disposes of the property they received — the gain being taken into account in the year of that later disposition^TY2026 (IRC § 1031(f)). The gain is not recognised at the time of the exchange but at the time of the later disposition, so it lands in a year the taxpayer may not have planned for.

How this has changed

The 2017 restriction is the whole of the recent history, and it hit businesses far harder than individuals. Pub. L. 115-97 § 13303(a) substituted "real property" for "property" throughout IRC § 1031(a)(1), and § 13303(b)(5) changed the section catchline to match — so equipment, vehicles, livestock, artwork and intangibles all left the section for exchanges after 2017^TY2026. Pub. L. 115-97 § 13303(a) substituted “real property” for “property” throughout IRC § 1031(a)(1), and § 13303(b)(1)(A) rewrote IRC § 1031(a)(2), which had previously excluded stock in trade, stocks, bonds, notes and several other categories. The exclusions became unnecessary once the section reached only real property, so the new paragraph excludes only real property held primarily for sale.

For individuals the change mattered chiefly for collectibles and cryptocurrency. For businesses it ended the routine deferral on every vehicle, machine, aircraft and herd exchange, which had been one of the most commonly used provisions in the Code.

The offset was on the other side of the ledger and is now permanent. The same Act raised expensing and bonus depreciation so that most replacement equipment could be written off in the year of acquisition, which for many businesses converted the lost deferral into a wash. Pub. L. 119-21 § 70301 has now made the full bonus allowance permanent, so that offset no longer has an expiry date — a point that matters, because the arithmetic only works where the replacement property is eligible and the taxable income limit does not bite.

Nothing in Pub. L. 119-21 amended IRC § 1031, so the section reads for 2026 as it read for 2025.

Exam focus

Start by asking what was exchanged. If it is anything other than real property, the section does not apply and the transaction is a sale — that disposes of most business questions immediately.

For real property, know the two clocks and that the exchange period ends at the earlier of the 180 days and the return due date, so a late-year relinquishment can run out of time in March.

Know that boot is recognised to its extent and that assumed liabilities count as boot, and know the basis formula as the old basis less money received plus gain recognised.

Finally, know that depreciation on the replacement property splits into exchanged basis, which continues the old schedule, and excess basis, which starts a new one.

Check yourself

1. A business trades in a fully depreciated forklift worth $9,000 against a new one. What does it report?

Answer: $9,000 of ordinary income. Pub. L. 115-97 § 13303(a) substituted "real property" for "property" throughout IRC § 1031(a)(1), and § 13303(b)(5) changed the section catchline to match — so equipment, vehicles, livestock, artwork and intangibles all left the section for exchanges after 2017^TY2026 — personal property left IRC § 1031 for exchanges after 2017, so the trade-in is a taxable disposition, and IRC § 1245(a)(1) makes the whole gain ordinary because adjusted basis is nil. The new forklift takes a cost basis of its full price.

2. A company exchanges real property with an adjusted basis of $500,000 for real property worth $700,000 plus $50,000 cash. How much gain is recognised, and what is the new basis?

Answer: $50,000 of gain, being the boot. gain is recognised to the extent of money and the fair market value of other property received, but not more than the realised gain — and a loss is never recognised on an exchange that would otherwise qualify^TY2026 (IRC § 1031(b)). the basis of the property given up, decreased by money received and increased by gain or decreased by loss recognised — with a liability assumed by the other party, as determined under IRC § 357(d), treated as money received^TY2026 (IRC § 1031(d)) gives the replacement a basis of $500,000 less the $50,000 received plus the $50,000 recognised — $500,000.

3. A business acquires replacement real property in an exchange, paying $300,000 above the carryover basis. How is the $300,000 depreciated?

Answer: As excess basis, treated as newly placed in service and depreciated over a fresh recovery period. the depreciable exchanged basis is recovered over the remaining recovery period of the relinquished property using its depreciation method, where both the period and the method prescribed for the replacement property are the same; any excess basis is treated as newly placed in service^TY2026 (Reg. § 1.168(i)-6(d)(1)) — only the exchanged basis continues the relinquished property’s remaining period and method.

4. Can a partner exchange her partnership interest for an interest in another partnership under IRC § 1031?

Answer: No. A partnership interest is not real property. an interest in a partnership with a valid IRC § 761(a) election out of subchapter K is treated as an interest in each of its assets rather than as a partnership interest^TY2026 (IRC § 1031(e)) makes the single exception, treating an interest in a partnership that has validly elected out of subchapter K under IRC § 761(a) as an interest in the underlying assets.

5. A taxpayer exchanges real property with her brother and he sells the property he received eighteen months later. What happens?

Answer: The nonrecognition is undone. nonrecognition is undone where, within 2 years of the last transfer in the exchange, the related person disposes of the property received or the taxpayer disposes of the property they received — the gain being taken into account in the year of that later disposition^TY2026 (IRC § 1031(f)) — the disposal fell within two years of the last transfer, so gain or loss is recognised by the taxpayer, taken into account as of the date of her brother’s disposition rather than the date of the exchange.