SECTION 1.1031(b)-1. RECEIPT OF OTHER PROPERTY OR MONEY IN TAX-FREE
EXCHANGE.
(a) If the taxpayer receives other property (in addition to property
permitted to be received without recognition of gain) or money--
(1) In an exchange described in section 1031(a) of property held for
investment or productive use in trade or business for property of
like kind to be held either for productive use or for investment,
(2) In an exchange described in section 1035(a) of insurance policies
or annuity contracts,
(3) In an exchange described in section 1036(a) of common stock for
common stock, or preferred stock for preferred stock, in the same
corporation and not in connection with a corporate reorganization, or
(4) In an exchange described in section 1037(a) of obligations of the
United States, issued under the Second Liberty Bond Act (31 U.S.C.
774(2)), solely for other obligations issued under such Act, the
gain, if any, to the taxpayer will be recognized under section
1031(b) in an amount not in excess of the sum of the money and the
fair market value of the other property, but the loss, if any, to the
taxpayer from such an exchange will not be recognized under section
1031(c) to any extent.
(b) The application of this section may be illustrated by the following
examples:
EXAMPLE 1. A, who is not a dealer in real estate, in 1954 exchanges
real estate held for investment, which he purchased in 1940 for
$5,000, for other real estate (to be held for productive use in trade
or business) which has a fair market value of $6,000, and $2,000 in
cash. The gain from the transaction is $3,000, but is recognized only
to the extent of the cash received of $2,000.
EXAMPLE 2.
(a) B, who uses the cash receipts and disbursements method of
accounting and the calendar year as his taxable year, has never
elected under section 454(a) to include in gross income
currently the annual increase in the redemption price of
non-interest-bearing obligations issued at a discount. In 1943,
for $750 each, B purchased four $1,000 series E U.S. savings
bonds bearing an issue date of March 1, 1943.
(b) On October 1, 1963, the redemption value of each such bond
was $1,396, and the total redemption value of the four bonds was
$5,584. On that date B submitted the four $1,000 series E bonds
to the United States in a transaction in which one of such
$1,000 bonds was reissued by issuing four $100 series E U.S.
savings bonds bearing an issue date of March 1, 1943, and by
considering six $100 series E bonds bearing an issue date of
March 1, 1943, to have been issued. The redemption value of each
such $100 series E bond was $139.60 on October 1, 1963. Then, as
part of the transaction, the six $100 series E bonds so
considered to have been issued and the three $1,000 series E
bonds were exchanged, in an exchange qualifying under section
1037(a), for five $1,000 series H U.S. savings bonds plus $25.60
in cash.
(c) The gain realized on the exchange qualifying under section
1037(a) is $2,325.60, determined as follows:
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Amount realized:
Par value of five series H bonds $5,000.00
Cash received 25.60
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Total realized 5,025.60
Less: Adjusted basis of series E bonds
surrendered in the exchange:
Three $1,000 series E bonds $2,250.00
Six $100 series E bonds at $75 each 450.00
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2,700.00
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Gain realized 2,325.60
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(d) Pursuant to section 1031(b), only $25.60 (the money
received) of the total gain of $2,325.60 realized on the
exchange is recognized at the time of exchange and must be
included in B's gross income for 1963. The $2,300 balance of the
gain ($2,325.60 less $25.60) must be included in B's gross
income for the taxable year in which the series H bonds are
redeemed or disposed of, or reach final maturity, whichever is
earlier, as provided in paragraph (c) of Section 1.454-1.
(e) The gain on the four $100 series E bonds, determined by
using $75 as a basis for each such bond, must be included in B's
gross income for the taxable year in which such bonds are
redeemed or disposed of, or reach final maturity, whichever is
earlier.
EXAMPLE 3.
(a) The facts are the same as in example (2), except that, as
part of the transaction, the $1,000 series E bond is reissued by
considering ten $100 series E bonds bearing an issue date of
March 1, 1943, to have been issued. Six of the $100 series E
bonds so considered to have been issued are surrendered to the
United States as part of the exchange qualifying under section
1037(a) and the other four are immediately redeemed.
(b) Pursuant to section 1031(b), only $25.60 (the money
received) of the total gain of $2,325.60 realized on the
exchange qualifying under section 1037(a) is recognized at the
time of the exchange and must be included in B's gross income
for 1963. The $2,300 balance of the gain ($2,325.60 less $25.60)
realized on such exchange must be included in B's gross income
for the taxable year in which the series H bonds are redeemed or
disposed of, or reach final maturity, whichever is earlier, as
provided in paragraph (c) of Section 1.454-1.
(c) The redemption on October 1, 1963, of the four $100 series E
bonds considered to have been issued at such time results in
gain of $258.40, which is then recognized and must be included
in B's gross income for 1963. This gain of $258.40 is the
difference between the $558.40 redemption value of such bonds on
the date of the exchange and the $300 (4 x $75) paid for such
series E bonds in 1943.
EXAMPLE 4. On November 1, 1963, C purchased for $91 a marketable U.S.
bond which was originally issued at its par value of $100 under the
Second Liberty Bond Act. On February 1, 1964, in an exchange
qualifying under section 1037(a), C surrendered the bond to the
United States for another marketable U.S. bond, which then had a fair
market value of $92, and $1.85 in cash, $0.85 of which was interest.
The $0.85 interest received is includible in gross income for the
taxable year of the exchange, but the $2 gain ($93 less $91) realized
on the exchange is recognized for such year under section 1031(b) to
the extent of $1 (the money received). Under section 1031(d), C's
basis in the bond received in exchange is $91 (his basis of $91 in
the bond surrendered, reduced by the $1 money received and increased
by the $1 gain recognized).
(c) Consideration received in the form of an assumption of liabilities (or
a transfer subject to a liability) is to be treated as OTHER PROPERTY OR
MONEY for the purposes of section 1031(b). Where, on an exchange described
in section 1031(b), each party to the exchange either assumes a liability
of the other party or acquires property subject to a liability, then, in
determining the amount of OTHER PROPERTY OR MONEY for purposes of section
1031(b), consideration given in the form of an assumption of liabilities
(or a receipt of property subject to a liability) shall be offset against
consideration received in the form of an assumption of liabilities (or a
transfer subject to a liability). See Section 1.1031(d)-2, examples (1)
and (2).
[T.D. 6500, 25 FR 11910, Nov. 26, 1960, as amended by T.D. 6935, 32 FR
15822, Nov. 17, 1967]
