Exploring the Extent of the Like-Kind Nonrecognition Treatment (and its Potential Demise)
Mertens - Law of Federal Income Tax - Developments & Highlights, October 2014
22 Pages Posted: 27 Jan 2016
Date Written: October 2014
An exchange of property, like a sale, generally is a taxable event. However, no gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged for property of a "like-kind" which is to be held for productive use in a trade or business or for investment. It is estimated that over a hundred thousand of like-kind exchanges occur annually, worth potentially ten billion to a hundred billion dollars.
This like-kind exchange provision was promulgated by the Revenue Act of 1921 as I.R.C. sec. 202(c). It took its present Code Section form, I.R.C. sec. 1031, in 1954. Since 1921, I.R.C. sec. 1031 and its predecessor has permitted a taxpayer to exchange a wide variety of business-use or investment assets for other like-kind business use or investment assets without recognizing taxable gain, providing for the deferral of the tax on capital gain until a later realization event. A taxpayer is able to make an unlimited number of exchanges and hold the capital gains deferred property until death, at which point the property will receive a stepped-up bases and completely avoid being taxed on prior appreciation.
With the proposed Tax Reform Act of 2014, Congress has refreshed the debate of whether to eliminate I.R.C. sec. 1031. While I.R.C. sec. 1031 has withstood such tax reforms previously, the Joint Committee of Taxation (JCT) on August 5, 2014 upped the ante of the cost of the provision to $98.6 billion (2014-2018) from $40.9 billion (2014-2013) on February 5, 2015. The Congressional Research Service in 2010 had, similar to the JCT in February, estimated $4.1 billion revenue loss ($1.5 billion from individual and $2.6 billion from corporations) for the year 2014. Thus, the August number represents a five hundred percent annual revenue loss estimate increase, heightening the potential that the like kind exchange provision may suffer either elimination or amendment.
JEL Classification: H24, H25, K34
Suggested Citation: Suggested Citation