The Like-Kind Exchange Equity Conundrum

Abstract

The tax-free treatment of like-kind exchanges presents one of tax law's most compelling equity conundrums. Tax law generally does not tax property holders on the appreciation in the property's value, but it does tax gain or loss recognized by property sellers and exchangers of non-like-kind property. In its basic Aristotelian form, equity requires that likes be treated alike, but it does not provide criteria for determining what is alike. Depending upon the criteria selected, exchangers of like-kind property can be similar to holders, or similar to sellers and exchangers of non-like-kind property. The equity conundrum is whether tax law should treat exchangers of like-kind property the same as holders of property or the same as sellers and exchangers of non-like-kind property. This Article solves the conundrum using Rawlsian and Hohfeldian concepts, which suggest that holders should not be taxed on property's appreciation. Second, it explains that once law exempts holders' appreciation from taxation, comparative equity dictates that it should also exempt from taxation exchanges of like-kind property.

Keywords: Equity, Equality, Section 1031, Like-Kind Exchange, Tax-Free Exchange, Like-Kind Property

JEL Classification: A10, D00, D63, H20, H24, K00, K34