SECTION 1.1031(k)-1. TREATMENT OF DEFERRED EXCHANGES.
(a) OVERVIEW. This section provides rules for the application of section
1031 and the regulations thereunder in the case of a "deferred exchange."
For purposes of section 1031 and this section, a deferred exchange is
defined as an exchange in which, pursuant to an agreement, the taxpayer
transfers property held for productive use in a trade or business or for
investment (the "relinquished property") and subsequently receives
property to be held either for productive use in a trade or business or
for investment (the "replacement property"). In the case of a deferred
exchange, if the requirements set forth in paragraphs (b), (c), and (d) of
this section (relating to identification and receipt of replacement
property) are not satisfied, the replacement property received by the
taxpayer will be treated as property which is not of a like kind to the
relinquished property. In order to constitute a deferred exchange, the
transaction must be an exchange (i.e., a transfer of property for
property, as distinguished from a transfer of property for money). For
example, a sale of property followed by a purchase of property of a like
kind does not qualify for nonrecognition of gain or loss under section
1031 regardless of whether the identification and receipt requirements of
section 1031(a)(3) and paragraphs (b), (c), and (d) of this section are
satisfied. The transfer of relinquished property in a deferred exchange is
not within the provisions of section 1031(a) if, as part of the
consideration, the taxpayer receives money or property which does not meet
the requirements of section 1031(a), but the transfer, if otherwise
qualified, will be within the provisions of either section 1031(b) or
(c). See Section 1.1031(a)-1(a)(2). In addition, in the case of a transfer
of relinquished property in a deferred exchange, gain or loss may be
recognized if the taxpayer actually or constructively receives money or
property which does not meet the requirements of section 1031(a) before
the taxpayer actually receives like-kind replacement property. If the
taxpayer actually or constructively receives money or property which does
not meet the requirements of section 1031(a) in the full amount of the
consideration for the relinquished property, the transaction will
constitute a sale, and not a deferred exchange, even though the taxpayer
may ultimately receive like-kind replacement property. For purposes of
this section, property which does not meet the requirements of section
1031(a) (whether by being described in section 1031(a)(2) or otherwise) is
referred to as "other property." For rules regarding actual and
constructive receipt, and safe harbors therefrom, see paragraphs (f) and
(g), respectively, of this section. For rules regarding the determination
of gain or loss recognized and the basis of property received in a
deferred exchange, see paragraph (j) of this section.
(b) IDENTIFICATION AND RECEIPT REQUIREMENTS--
(1) IN GENERAL. In the case of a deferred exchange, any replacement
property received by the taxpayer will be treated as property which
is not of a like kind to the relinquished property if--
(i) The replacement property is not "identified" before the end
of the "identification period," or
(ii) The identified replacement property is not received before
the end of the "exchange period."
(2) IDENTIFICATION PERIOD AND EXCHANGE PERIOD.
(i) The identification period begins on the date the taxpayer
transfers the relinquished property and ends at midnight on the
45th day thereafter.
(ii) The exchange period begins on the date the taxpayer
transfers the relinquished property and ends at midnight on the
earlier of the 180th day thereafter or the due date (including
extensions) for the taxpayer's return of the tax imposed by
chapter 1 of subtitle A of the Code for the taxable year in
which the transfer of the relinquished property occurs.
(iii) If, as part of the same deferred exchange, the taxpayer
transfers more than one relinquished property and the
relinquished properties are transferred on different dates, the
identification period and the exchange period are determined by
reference to the earliest date on which any of the properties
are transferred.
(iv) For purposes of this paragraph (b)(2), property is
transferred when the property is disposed of within the meaning
of section 1001(a).
(3) EXAMPLE. This paragraph (b) may be illustrated by the following
example.
EXAMPLE.
(i) M is a corporation that files its Federal income tax
return on a calendar year basis. M and C enter into an
agreement for an exchange of property that requires M to
transfer property X to C. Under the agreement, M is to
identify like-kind replacement property which C is required
to purchase and to transfer to M. M transfers property X to
C on November 16, 1992.
(ii) The identification period ends at midnight on December
31, 1992, the day which is 45 days after the date of
transfer of property X. The exchange period ends at
midnight on March 15, 1993, the due date for M's Federal
income tax return for the taxable year in which M
transferred property X. However, if M is allowed the
automatic six-month extension for filing its tax return,
the exchange period ends at midnight on May 15, 1993, the
day which is 180 days after the date of transfer of
property X.
(c) IDENTIFICATION OF REPLACEMENT PROPERTY BEFORE THE END OF THE
IDENTIFICATION PERIOD--
(1) IN GENERAL. For purposes of paragraph (b)(1)(i) of this section
(relating to the identification requirement), replacement property is
identified before the end of the identification period only if the
requirements of this paragraph (c) are satisfied with respect to the
replacement property. However, any replacement property that is
received by the taxpayer before the end of the identification period
will in all events be treated as identified before the end of the
identification period.
(2) MANNER OF IDENTIFYING REPLACEMENT PROPERTY. Replacement property
is identified only if it is designated as replacement property in a
written document signed by the taxpayer and hand delivered, mailed,
telecopied, or otherwise sent before the end of the identification
period to either--
(i) The person obligated to transfer the replacement property to
the taxpayer (regardless of whether that person is a
disqualified person as defined in paragraph (k) of this
section); or
(ii) Any other person involved in the exchange other than the
taxpayer or a disqualified person (as defined in paragraph (k)
of this section).
Examples of persons involved in the exchange include any of the
parties to the exchange, an intermediary, an escrow agent, and a
title company. An identification of replacement property made in
a written agreement for the exchange of properties signed by all
parties thereto before the end of the identification period will
be treated as satisfying the requirements of this paragraph
(c)(2).
(3) DESCRIPTION OF REPLACEMENT PROPERTY. Replacement property is
identified only if it is unambiguously described in the written
document or agreement. Real property generally is unambiguously
described if it is described by a legal description, street address,
or distinguishable name (e.g., the Mayfair Apartment Building).
Personal property generally is unambiguously described if it is
described by a specific description of the particular type of
property. For example, a truck generally is unambigously described if
it is described by a specific make, model, and year.
(4) ALTERNATIVE AND MULTIPLE PROPERTIES.
(i) The taxpayer may identify more than one replacement
property. Regardless of the number of relinguished properties
transferred by the taxpayer as part of the same deferred
exchange, the maximum number of replacement properties that the
taxpayer may identify is--
(A) Three properties without regard to the fair market
values of the properties (the "3-property rule"), or
(B) Any number of properties as long as their aggregate
fair market value as of the end of the identification
period does not exceed 200 percent of the aggregate fair
market value of all the relinguished properties as of the
date the relinguished properties were transferred by the
taxpayer (the "200-percent rule").
(ii) If, as of the end of the identification period, the
taxpayer has identified more properties as replacement
properties than permitted by paragraph (c)(4)(i) of this
section, the taxpayer is treated as if no replacement property
had been identified. The preceding sentence will not apply,
however, and an identification satisfying the requirements of
paragraph (c)(4)(i) of this section will be considered made,
with respect to--
(A) Any replacement property received by the taxpayer
before the end of the identification period, and
(B) Any replacement property identified before the end of
the identification period and received before the end of
the exchange period, but only if the taxpayer receives
before the end of the exchange period identified
replacement property the fair market vlaue of which is at
least 95 percent of the aggregate fair market value of all
identified replacement properties (the "95-percent rule").
For this purpose, the fair market value of each identified
replacement property is determined as of the earlier of the
date the property is received by the taxpayer or the last
day of the exchange period.
(iii) For purposes of applying the 3-property rule, the
200-percent rule, and the 95-percent rule, all identifications
of replacement property, other than identifications of
replacement property that have been revoked in the manner
provided in paragraph (c)(6) of this section, are taken into
account. For example, if, in a deferred exchange, B transfers
property X with a fair market value of $100,000 to C and B
receives like-kind property Y with a fair market value of
$50,000 before the end of the identification period, under
paragraph (c)(1) of this section, property Y is treated as
identified by reason of being received before the end of the
identification period. Thus, under paragraph (c)(4)(i) of this
section, B may identify either two additional replacement
properties of any fair market value or any number of additional
replacement properties as long as the aggregate fair market
value of the additional replacement properties does not exceed
$150,000.
(5) INCIDENTAL PROPERTY DISREGARDED.
(i) Solely for purposes of applying this paragraph (c), property
that is incidental to a larger item of property is not treated
as property that is separate from the larger item of property.
Property is incidental to a larger item of property if--
(A) In standard commercial transactions, the property is
typically transferred together with the larger item of
property, and
(B) The aggregate fair market value of all of the
incidental property does not exceed 15 percent of the
aggregate fair market value of the larger item of property.
(ii) This paragraph (c)(5) may be illustrated by the following
examples.
EXAMPLE 1. For purposes of paragraph (c) of this section, a
spare tire and tool kit will not be treated as separate
property from a truck with a fair market value of $10,000,
if the aggregate fair market value of the spare tire and
tool kit does not exceed $1,500. For purposes of the
3-property rule, the truck, spare tire, and tool kit are
treated as 1 property. Moreover, for purposes of paragraph
(c)(3) of this section (relating to the description of
replacement property), the truck, spare tire, and tool kit
are all considered to be unambiguously described if the
make, model, and year of the truck are specified, even if
no reference is made to the spare tire and tool kit.
EXAMPLE 2. For purposes of paragraph (c) of this section,
furniture, laundry machines, and other miscellaneous items
of personal property will not be treated as separate
property from an apartment building with a fair market
value of $1,000,000, if the aggregate fair market value of
the furniture, laundry machines, and other personal
property does not exceed $150,000. For purposes of the
3-property rule, the apartment building, furniture, laundry
machines, and other personal property are treated as 1
property. Moreover, for purposes of paragraph (c)(3) of
this section (relating to the description of replacement
property), the apartment building, furniture, laundry
machines, and other personal property are all considered to
be unambiguously described if the legal description, street
address, or distinguishable name of the apartment building
is specified, even if no reference is made to the
furniture, laundry machines, and other personal property.
(6) REVOCATION OF IDENTIFICATION. An identification of replacement
property may be revoked at any time before the end of the
identification period. An identification of replacement property is
revoked only if the revocation is made in a written document signed
by the taxpayer and hand delivered, mailed, telecopied, or othewise
sent before the end of the identification period to the person to
whom the identification of the replacement property was sent. An
identification of replacement property that is made in a written
agreement for the exchange of properties is treated as revoked only
if the revocation is made in a written amendment to the agreement or
in a written document signed by the taxpayer and hand delivered,
mailed, telecopied, or othewise sent before the end of the
identification period to all of the parties to the agreement.
(7) EXAMPLES. This paragraph (c) may be illustrated by the following
examples. Unless otherwise provided in an example, the following
facts are assumed: B, a calendar year taxpayer, and C agree to enter
into a deferred exchange. Pursuant to their agreement, B transfers
real property X to C on May 17, 1991. Real property X, which has been
held by B for investment, is unencumbered and has a fair market value
on May 17, 1991, of $100,000. On or before July 1, 1991 (the end of
the identification period), B is to identify replacement property
that is of a like kind to real property X. On or before November 13,
1991 (the end of the exchange period), C is required to purchase the
property identified by B and to transfer that property to B. To the
extent the fair market value of the replacement property transferred
to B is greater or less than the fair market value of real property
X, either B or C, as applicable, will make up the difference by
paying cash to the other party after the date the replacement
property is received by B. No replacement property is identified in
the agreement. When subsequently identified, the replacement property
is described by legal description and is of a like kind to real
property X (determined without regard to section 1031(a)(3) and this
section). B intends to hold the replacement property received for
investment.
EXAMPLE 1.
(i) On July 2, 1991, B identifies real property E as
replacement property by designating real property E as
replacement property in a written document signed by B and
personally delivered to C.
(ii) Because the identification was made after the end of
the identification period, pursuant to paragraph (b)(1)(i)
of this section (relating to the identification
requirement), real property E is treated as property which
is not of a like kind to real property X.
EXAMPLE 2.
(i) C is a corporation of which 20 percent of the
outstanding stock is owned by B. On July 1, 1991, B
identifies real property F as replacement property by
designating real property F as replacement property in a
written document signed by B and mailed to C.
(ii) Because C is the person obligated to transfer the
replacement property to B, real property F is identified
before the end of the identification period. The fact that
C is a "disqualified person" as defined in paragraph (k) of
this section does not change this result.
(iii) Real property F would also have been treated as
identified before the end of the identification period if,
instead of sending the identification to C, B had
designated real property F as replacement property in a
written agreement for the exchange of properties signed by
all parties thereto on or before July 1, 1991.
EXAMPLE 3.
(i) On June 3, 1991, B identifies the replacement property
as "unimproved land located in Hood County with a fair
market value not to exceed $100,000." The designation is
made in a written document signed by B and personally
delivered to C. On July 8, 1991, B and C agree that real
property G is the property described in the June 3, 1991
document.
(ii) Because real property G was not unambiguously
described before the end of the identification period, no
replacement property is identified before the end of the
identification period.
EXAMPLE 4.
(i) On June 28, 1991, B identifies real properties H, J,
and K as replacement properties by designating these
properties as replacement properties in a written document
signed by B and personally delivered to C. The written
document provides that by August 1, 1991, B will orally
inform C which of the identified properties C is to
transfer to B. As of July 1, 1991, the fair market values
of real properties H, J, and K are $75,000, $100,000, and
$125,000, respectively.
(ii) Because B did not identify more than three properties
as replacement properties, the requirements of the
3-property rule are satisfied, and real properties H, J,
and K are all identified before the end of the
identification period.
EXAMPLE 5.
(i) On May 17, 1991, B identifies real properties L, M, N,
and P as replacement properties by designating these
properties as replacement properties in a written document
signed by B and personally delivered to C. The written
document provides that by July 2, 1991, B will orally
inform C which of the identified properties C is to
transfer to B. As of July 1, 1991, the fair market values
of real properties L, M, N, and P are $30,000, $40,000,
$50,000, and $60,000, respectively.
(ii) Although B identified more than three properties as
replacement properties, the aggregate fair market value of
the identified properties as of the end of the
identification period ($180,000) did not exceed 200 percent
of the aggregate fair market value of real property X (200%
x $100,000 = $200,000). Therefore, the requirements of the
200-percent rule are satisfied, and real properties L, M,
N, and P are all identified before the end of the
identification period.
EXAMPLE 6.
(i) On June 21, 1991, B identifies real properties Q, R,
and S as replacement properties by designating these
properties as replacement properties in a written document
signed by B and mailed to C. On June 24, 1991, B identifies
real properties T and U as replacement properties in a
written document signed by B and mailed to C. On June 28,
1991, B revokes the identification of real properties Q and
R in a written document signed by B and personally
delivered to C.
(ii) B has revoked the identification of real properties Q
and R in the manner provided by paragraph (c)(6) of this
section. Identifications of replacement property that have
been revoked in the manner provided by paragraph (c)(6) of
this section are not taken into account for purposes of
applying the 3-property rule. Thus, as of June 28, 1991, B
has identified only replacement properties S, T, and U for
purposes of the 3-property rule. Because B did not identify
more than three properties as replacement properties for
purposes of the 3-property rule, the requirements of that
rule are satisfied, and real properties S, T, and U are all
identified before the end of the identification period.
EXAMPLE 7.
(i) On May 20, 1991, B identifies real properties V and W
as replacement properties by designating these properties
as replacement properties in a written document signed by B
and personally delivered to C. On June 4, 1991, B
identifies real properties Y and Z as replacement
properties in the same manner. On June 5, 1991, B
telephones C and orally revokes the identification of real
properties V and W. As of July 1, 1991, the fair market
values of real properties V, W, Y, and Z are $50,000,
$70,000, $90,000, and $100,000, respectively. On July 31,
1991, C purchases real property Y and Z and transfers them
to B.
(ii) Pursuant to paragraph (c)(6) of this section (relating
to revocation of identification), the oral revocation of
the identification of real properties V and W is invalid.
Thus, the identification of real properties V and W is
taken into account for purposes of determining whether the
requirements of paragraph (c)(4) of this section (relating
to the identification of alternative and multiple
properties) are satisfied. Because B identified more than
three properties and the aggregate fair market value of the
identified properties as of the end of the identification
period ($310,000) exceeds 200 percent of the fair market
value of real property X (200% x $100,000 = $200,000), the
requirements of paragraph (c)(4) of this section are not
satisfied, and B is treated as if B did not identify any
replacement property.
(d) RECEIPT OF IDENTIFIED REPLACEMENT PROPERTY--
(1) IN GENERAL. For purposes of paragraph (b)(1)(ii) of this section
(relating to the receipt requirement), the identified replacement
property is received before the end of the exchange period only if
the requriements of this paragraph (d) are satisfied with respect to
the replacement property. In the case of a deferred exchange, the
identified replacement property is received before the end of the
exchange period if--
(i) The taxpayer receives the replacement property before the
end of the exchange period, and
(ii) The replacement property received is substantially the same
property as identified.
If the taxpayer has identified more than one replacement property,
section 1031(a)(3)(B) and this paragraph (d) are applied separately
to each replacement property.
(2) EXAMPLES. This paragraph (d) may be illustrated by the following
examples. The following facts are assumed: B, a calendar year
taxpayer, and C agree to enter into a deferred exchange. Pursuant to
their agreement, B transfers real property X to C on May 17, 1991.
Real property X, which has been held by B for investment, is
unencumbered and has a fair market value on May 17, 1991, of
$100,000. On or before July 1, 1991 (the end of the identification
period), B is to identify replacement property that is of a like kind
to real property X. On or before November 13, 1991 (the end of the
exchange period), C is required to purchase the property identified
by B and to transfer that property to B. To the extent the fair
market value of the replacement property transferred to B is greater
or less than the fair market value of real property X, either B or C,
as applicable, will make up the difference by paying cash to the
other party after the date the replacement property is received by B.
The replacement property is identified in a manner that satisfies
paragraph (c) of this section (relating to identification of
replacement property) and is of a like kind to real property X
(determined without regard to section 1031(a)(3) and this section). B
intends to hold any replacement property received for investment.
EXAMPLE 1.
(i) In the agreement, B identifies real properties J, K,
and L as replacement properties. The agreement provides
that by July 26, 1991, B will orally inform C which of the
properties C is to transfer to B.
(ii) As of July 1, 1991, the fair market values of real
properties J, K, and L are $75,000, $100,000, and $125,000,
respectively. On July 26, 1991, B instructs C to acquire
real property K. On October 31, 1991, C purchases real
property K for $100,000 and transfers the property to B.
(iii) Because real property K was identified before the end
of the identification period and was received before the
end of the exchange period, the identification and receipt
requirements of section 1031(a)(3) and this section are
satisfied with respect to real property K.
EXAMPLE 2.
(i) In the agreement, B identifies real property P as
replacement property. Real property P consists of two acres
of unimproved land. On October 15, 1991, the owner of real
property P erects a fence on the property. On November 1,
1991, C purchases real property P and transfers it to B.
(ii) The erection of the fence on real property P
subsequent to its identification did not alter the basic
nature or character of real property P as unimproved land.
B is considered to have received substantially the same
property as identified.
EXAMPLE 3.
(i) In the agreement, B identifies real property Q as
replacement property. Real property Q consists of a barn on
two acres of land and has a fair market value of $250,000
($187,500 for the barn and underlying land and $87,500 for
the remaining land). As of July 26, 1991, real property Q
remains unchanged and has a fair market value of $250,000.
On that date, at B's direction, C purchases the barn and
underlying land for $187,500 and transfers it to B, and B
pays $87,500 to C.
(ii) The barn and underlying land differ in basic nature or
character from real property Q as a whole, B is not
considered to have received substantially the same property
as identified.
EXAMPLE 4.
(i) In the agreement, B identifies real property R as
replacement property. Real property R consists of two acres
of unimproved land and has a fair market value of $250,000.
As of October 3, 1991, real property R remains unimproved
and has a fair market value of $250,000. On that date, at
B's direction, C purchases 1 1/2 acres of real property R
for $187,500 and transfers it to B, and B pays $87,500 to
C.
(ii) The portion of real property R that B received does
not differ from the basic nature or character of real
property R as a whole. Moreover, the fair market value of
the portion of real property R that B received ($187,500)
is 75 percent of the fair market value of real property R
as of the date of receipt. Accordingly, B is considered to
have received substantially the same property as
identified.
(e) SPECIAL RULES FOR IDENTIFICATION AND RECEIPT OF REPLACEMENT PROPERTY
TO BE PRODUCED--
(1) IN GENERAL. A transfer of relinquished property in a deferred
exchange will not fail to qualify for nonrecognition of gain or loss
under section 1031 merely because the replacement property is not in
existence or is being produced at the time the property is identified
as replacement property. For purposes of this paragraph (e), the
terms "produced" and "production" have the same meanings as provided
in section 263A(g)(1) and the regulations thereunder.
(2) IDENTIFICATION OF REPLACEMENT PROPERTY TO BE PRODUCED.
(i) In the case of replacement property that is to be produced,
the replacement property must be identified as provided in
paragraph (c) of this section (relating to identification of
replacement property). For example, if the identified
replacement property consists of improved real property where
the improvements are to be constructed, the description of the
replacement property satisfies the requirements of paragraph
(c)(3) of this section (relating to description of replacement
property) if a legal description is provided for the underlying
land and as much detail is provided regarding construction of
the improvements as is practicable at the time the
identification is made.
(ii) For purposes of paragraphs (c)(4)(i)(B) and (c)(5) of this
section (relating to the 200-percent rule and incidental
property), the fair market value of replacement property that is
to be produced is its estimated fair market value as of the date
it is expected to be received by the taxpayer.
(3) RECEIPT OF REPLACEMENT PROPERTY TO BE PRODUCED.
(i) For purposes of paragraph (d)(1)(ii) of this section
(relating to receipt of the identified replacement property), in
determining whether the replacement property received by the
taxpayer is substantially the same property as identified where
the identified replacement property is property to be produced,
variations due to usual or typical production changes are not
taken into account. However, if substantial changes are made in
the property to be produced, the replacement property received
will not be considered to be substantially the same property as
identified.
(ii) If the identified replacement property is personal property
to be produced, the replacement property received will not be
considered to be substantially the same property as identified
unless production of the replacement property received is
completed on or before the date the property is received by the
taxpayer.
(iii) If the identified replacement property is real property to
be produced and the production of the property is not completed
on or before the date the taxpayer receives the property, the
property received will be considered to be substantially the
same property as identified only if, had production been
completed on or before the date the taxpayer receives the
replacement property, the property received would have been
considered to be substantially the same property as identified.
Even so, the property received is considered to be substantially
the same property as identified only to the extent the property
received constitutes real property under local law.
(4) ADDITIONAL RULES. The transfer of relinquished property is not
within the provisions of section 1031(a) if the relinquished property
is transferred in exchange for services (including production
services). Thus, any additional production occurring with respect to
the replacement property after the property is received by the
taxpayer will not be treated as the receipt of property of a like
kind.
(5) EXAMPLE. This paragraph (e) may be illustrated by the following
example.
EXAMPLE.
(i) B, a calendar year taxpayer, and C agree to enter into
a deferred exchange. Pursuant to their agreement, B
transfers improved real property X and personal property Y
to C on May 17, 1991. On or before November 13, 1991 (the
end of the exchange period), C is required to transfer to B
real property M, on which C is constructing improvements,
and personal property N, which C is producing. C is
obligated to complete the improvements and production
regardless of when properties M and N are transferred to B.
Properties M and N are identified in a manner that
satisfies paragraphs (c) (relating to identification of
replacement property) and (e)(2) of this section. In
addition, properties M and N are of a like kind,
respectively, to real property X and personal property Y
(determined without regard to section 1031(a)(3) and this
section). On November 13, 1991, when construction of the
improvements to property M is 20 percent completed and the
production of property N is 90 percent completed, C
transfers to B property M and property N. If construction
of the improvements had been completed, property M would
have been considered to be substantially the same property
as identified. Under local law, property M constitutes real
property to the extent of the underlying land and the 20
percent of the construction that is completed.
(ii) Because property N is personal property to be produced
and production of property N is not completed before the
date the property is received by B, property N is not
considered to be substantially the same property as
identified and is treated as property which is not of a
like kind to property Y.
(iii) Property M is considered to be substantially the same
property as identified to the extent of the underlying land
and the 20 percent of the construction that is completed
when property M is received by B. However, any additional
construction performed by C with respect to property M
after November 13, 1991, is not treated as the receipt of
property of a like kind.
(f) RECEIPT OF MONEY OR OTHER PROPERTY
(1) IN GENERAL. A transfer of relinquished property in a deferred
exchange is not within the provisions of section 1031(a) if, as part
of the consideration, the taxpayer receives money or other property.
However, such a transfer, if otherwise qualified, will be within the
provisions of either section 1031(b) or (c). See section 1.1031(a)-
1(a)(2). In addition, in the case of a transfer of relinquished
property in a deferred exchange, gain or loss may be recognized if
the taxpayer actually or constructively receives money or other
property before the taxpayer actually receives like-kind replacement
property. If the taxpayer actually or constructively receives money
or other property in the full amount of the consideration for the
relinquished property before the taxpayer actually receives like-kind
replacement property, the transaction will constitute a sale and not
a deferred exchange, even though the taxpayer may ultimately receive
like-kind replacement property.
(2) ACTUAL AND CONSTRUCTIVE RECEIPT. Except as provided in paragraph
(9) of this section (relating to safe harbors), for purposes of
section 1031 and this section, the determination of whether (or the
extent to which) the taxpayer is in actual or constructive receipt of
money or other property before the taxpayer actually receives like-
kind replacement property is made under the general rules concerning
actual and constructive receipt and without regard to the taxpayer's
method of accounting. The taxpayer is in actual receipt of money or
property at the time the taxpayer actually receives the money or
property or receives the economic benefit of the money or property.
The taxpayer is in constructive receipt of money or property at the
time the money or property is credited to the taxpayer's account, set
apart for the taxpayer, or otherwise made available so that the
taxpayer may draw upon it at any time or so that the taxpayer can
draw upon it if notice of intention to draw is given. Although the
taxpayer is not in constructive receipt of money or property if the
taxpayer's control of its receipt is subject to substantial
limitations or restrictions, the taxpayer is in constructive receipt
of the money or property at the time the limitations or restrictions
lapse, expire, or are waived. In addition, actual or constructive
receipt of money or property by an agent of the taxpayer (determined
without regard to paragraph (k) of this section) is actual or
constructive receipt by the taxpayer.
(3) EXAMPLE. This paragraph (f) may be illustrated by the following
example.
EXAMPLE.
(i) B, a calendar year taxpayer, and C agree to enter into
a deferred exchange. Pursuant to the agreement, on May 17,
1991, B transfers real property X to C. Real property X,
which has been held by B for investment, is unencumbered
and has a fair market value on May 17, 1991, of $100,000.
On or before July 1, 1991 (the end of the identification
period), B is to identify replacement property that is of a
like kind to real property X. On or before November 13,
1991 (the end of the exchange period), C is required to
purchase the property identified by B and to transfer that
property to B. At any time after May 17, 1991, and before C
has purchased the replacement property, B has the right,
upon notice, to demand that C pay $100,000 in lieu of
acquiring and transferring the replacement property.
Pursuant to the agreement, B identifies replacement
property, and C purchases the replacement property and
transfers it to B.
(ii) Under the agreement, B has the unrestricted right to
demand the payment of $100,000 as of May 17, 1991. B is
therefore in constructive receipt of $100,000 on that date.
Because B is in constructive receipt of money in the full
amount of the consideration for the relinquished property
before B actually receives the like-kind replacement
property, the transaction constitutes a sale, and the
transfer of real property X does not qualify for
nonrecognition of gain or loss under section 1031. B is
treated as if B received the $100,000 in consideration for
the sale of real property X and then purchased the like-
kind replacement property.
(iii) If B's right to demand payment of the $100,000 were
subject to a substantial limitation or restriction (e.g.,
the agreement provided that B had no right to demand
payment before November 14, 1991 (the end of the exchange
period)), then, for purposes of this section, B would not
be in actual or constructive receipt of the money unless
(or until) the limitation or restriction lapsed, expired,
or was waived.
(g) SAFE HARBORS--
(1) IN GENERAL. Paragraphs (g)(2) through (g)(5) of this section set
forth four safe harbors the use of which will result in a
determination that the taxpayer is not in actual or constructive
receipt of money or other property for purposes of section 1031 and
this section. More than one safe harbor can be used in the same
deferred exchange, but the terms and conditions of each must be
separately satisfied. For purposes of the safe harbor rules, the term
"taxpayer" does not include a person or entity utilized in a safe
harbor (e.g., a qualified intermediary). See paragraph (g)(8),
EXAMPLE 3(v), of this section.
(2) SECURITY OR GUARANTEE ARRANGEMENTS.
(i) In the case of a deferred exchange, the determination of
whether the taxpayer is in actual or constructive receipt of
money or other property before the taxpayer actually receives
like-kind replacement property will be made without regard to
the fact that the obligation of the taxpayer's transferee to
transfer the replacement property to the taxpayer is or may be
secured or guaranteed by one or more of the following--
(A) A mortgage, deed of trust, or other security interest
in property (other than cash or a cash equivalent),
(B) A standby letter of credit which satisfies all of the
requirements of Section 15A.453-1(b)(3)(iii) and which may
not be drawn upon in the absence of a default of the
transferee's obligation to transfer like-kind replacement
property to the taxpayer, or
(C) A guarantee of a third party.
(ii) Paragraph (g)(2)(i) of this section ceases to apply at the
time the taxpayer has an immediate ability or unrestricted right
to receive money or other property pursuant to the security or
guarantee arrangement.
(3) QUALIFIED ESCROW ACCOUNTS AND QUALIFIED TRUSTS.
(i) In the case of a deferred exchange, the determination of
whether the taxpayer is in actual or constructive receipt of
money or other property before the taxpayer actually receives
like-kind replacement property will be made without regard to
the fact that the obligation of the taxpayer's transferee to
transfer the replacement property to the taxpayer is or may be
secured by cash or a cash equivalent if the cash or cash
equivalent is held in a qualified escrow account or in a
qualified trust.
(ii) A qualified escrow account is an escrow account wherein--
(A) The escrow holder is not the taxpayer or a disqualified
person (as defined in paragraph (k) of this section), and
(B) The escrow agreement expressly limits the taxpayer's
rights to receive, pledge, borrow, or otherwise obtain the
benefits of the cash or cash equivalent held in the escrow
account as provided in paragraph (g)(6) of this section.
(iii) A qualified trust is a trust wherein--
(A) The trustee is not the taxpayer or a disqualified
person (as defined in paragraph (k) of this section, except
that for this purpose the relationship between the taxpayer
and the trustee created by the qualified trust will not be
considered a relationship under section 267(b)), and
(B) The trust agreement expressly limits the taxpayer's
rights to receive, pledge, borrow, or otherwise obtain the
benefits of the cash or cash equivalent held by the trustee
as provided in paragraph (g)(6) of this section.
(iv) Paragraph (g)(3)(i) of this section ceases to apply at the
time the taxpayer has an immediate ability or unrestricted right
to receive, pledge, borrow, or otherwise obtain the benefits of
the cash or cash equivalent held in the qualified escrow account
or qualified trust. Rights conferred upon the taxpayer under
state law to terminate or dismiss the escrow holder of a
qualified escrow account or the trustee of a qualified trust are
disregarded for this purpose.
(v) A taxpayer may receive money or other property directly from
a party to the exchange, but not from a qualified escrow account
or a qualified trust, without affecting the application of
paragraph (g)(3)(i) of this section.
(4) QUALIFIED INTERMEDIARIES.
(i) In the case of a taxpayer's transfer of relinquished
property involving a qualified intermediary, the qualified
intermediary is not considered the agent of the taxpayer for
purposes of section 1031(a). In such a case, the taxpayer's
transfer of relinquished property and subsequent receipt of
like-kind replacement property is treated as an exchange, and
the determination of whether the taxpayer is in actual or
constructive receipt of money or other property before the
taxpayer actually receives like-kind replacement property is
made as if the qualified intermediary is not the agent of the
taxpayer.
(ii) Paragraph (g)(4)(i) of this section applies only if the
agreement between the taxpayer and the qualified intermediary
expressly limits the taxpayer's rights to receive, pledge,
borrow, or otherwise obtain the benefits of money or other
property held by the qualified intermediary as provided in
paragraph (g)(6) of this section.
(iii) A qualified intermediary is a person who--
(A) Is not the taxpayer or a disqualified person (as
defined in paragraph (k) of this section), and
(B) Enters into a written agreement with the taxpayer (the
"exchange agreement") and, as required by the exchange
agreement, acquires the relinquished property from the
taxpayer, transfers the relinquished property, acquires the
replacement property, and transfers the replacement
property to the taxpayer.
(iv) Regardless of whether an intermediary acquires and
transfers property under general tax principals, solely for
purposes of paragraph (g)(4)(iii)(B) of this section--
(A) An intermediary is treated as acquiring and
transferring property if the intermediary acquires and
transfers legal title to that property,
(B) An intermediary is treated as acquiring and
transferring the relinquished property if the intermediary
(either on its own behalf or as the agent of any party to
the transaction) enters into an agreement with a person
other than the taxpayer for the transfer of the
relinquished property to that person and, pursuant to that
agreement, the relinquished property is transferred to that
person, and
(C) An intermediary is treated as acquiring and
transferring replacement property if the intermediary
(either on its own behalf or as the agent of any party to
the transaction) enters into an agreement with the owner of
the replacement property for the transfer of that property
and, pursuant to that agreement, the replacement property
is transferred to the taxpayer.
(v) Solely for purposes of paragraphs (g)(4)(iii) and (g)(4)(iv)
of this section, an intermediary is treated as entering into an
agreement if the rights of a party to the agreement are assigned
to the intermediary and all parties to that agreement are
notified in writing of the assignment on or before the date of
the relevent transfer of property. For example, if a taxpayer
enters into an agreement for the transfer of relinquished
property and thereafter assigns its rights in that agreement to
an intermediary and all parties to that agreement are notified
in writing of the assignment on or before the date of the
transfer of the relinquished property, the intermediary is
treated as entering into that agreement. If the relinquished
property is transferred pursuant to that agreement, the
intermediary is treated as having acquired and transferred the
relinquished property.
(vi) Paragraph (g)(4)(i) of this section ceases to apply at the
time the taxpayer has an immediate ability or unrestricted right
to receive, pledge, borrow, or otherwise obtain the benefits of
money or other property held by the qualified intermediary.
Rights conferred upon the taxpayer under state law to terminate
or dismiss the qualified intermediary are disregarded for this
purpose.
(vii) A taxpayer may receive money or other property directly
from a party to the transaction other than the qualified
intermediary without affecting the application of paragraph
(g)(4)(i) of this section.
(5) INTEREST AND GROWTH FACTORS. In the case of a deferred exchange,
the determination of whether the taxpayer is in actual or
constructive receipt of money or other property before the taxpayer
actually receives the like-kind replacement property will be made
without regard to the fact that the taxpayer is or may be entitled to
receive any interest or growth factor with respect to the deferred
exchange. The preceding sentence applies only if the agreement
pursuant to which the taxpayer is or may be entitled to the interest
or growth factor expressly limits the taxpayer's rights to receive
the interest or growth factor as provided in paragragh (g)(6) of this
section. For additional rules concerning interest or growth factors,
see paragraph (h) of this section.
(6) ADDITIONAL RESTRICTIONS ON SAFE HARBORS UNDER PARAGRAPHS (g)(3)
THROUGH (g)(5).
(i) An agreement limits a taxpayer's rights as provided in this
paragraph (g)(6) only if the agreement provides that the
taxpayer has no rights, except as provided in paragraph
(g)(6)(ii) and (g)(6)(iii) of this section, to receive, pledge,
borrow, or otherwise obtain the benefits of money or other
property before the end of the exchange period.
(ii) The agreement may provide that if the taxpayer has not
identified replacement property by the end of the identification
period, the taxpayer may have rights to receive, pledge, borrow,
or othewise obtain the benefits of money or other property at
any time after the end of the identification period.
(iii) The agreement may provide that if the taxpayer has
identified replacement property, the taxpayer may have rights to
receive, pledge, borrow, or otherwise obtain the benefits of
money or other property upon or after--
(A) The receipt by the taxpayer of all of the replacement
property to which the taxpayer is entitled under the
exchange agreement, or
(B) The occurrence after the end of the identification
period of a material and substantial contingency that--
(1) Relates to the deferred exchange,
(2) Is provided for in writing, and
(3) Is beyond the control of the taxpayer and of any
disqualified person (as defined in paragraph (k) of
this section), other than the person obligated to
transfer the replacement property to the taxpayer.
(7) ITEMS DISREGARDED IN APPLYING SAFE HARBORS UNDER PARAGRAPHS
(g)(3) THROUGH (g)(5). In determining whether a safe harbor under
paragraphs (g)(3) through (g)(5) of this section ceases to apply and
whether the taxpayer's rights to receive, pledge, borrow, or
otherwise obtain the benefits of money or other property are
expressly limited as provided in paragraph (g)(6) of this section,
the taxpayer's receipt of or right to receive any of the following
items will be disregarded--
(i) Items that a seller may receive as a consequence of the
disposition of property and that are not included in the amount
realized from the disposition of property (e.g., prorated
rents), and
(ii) Transactional items that relate to the disposition of the
relinquished property or to the acquisition of the replacement
property and appear under local standards in the typical closing
statements as the responsibility of a buyer or seller (e.g.,
commissions, prorated taxes, recording or transfer taxes, and
title company fees).
(8) EXAMPLES. This paragraph (g) may be illustrated by the following
examples. Unless otherwise provided in an example, the following
facts are assumed: B, a calendar year taxpayer, and C agree to enter
into a deferred exchange. Pursuant to their agreement, B is to
transfer real property X to C on May 17, 1991. Real property X, which
has been held by B for investment, is unencumbered and has a fair
market value on May 17, 1991, of $100,000. On or before July 1, 1991
(the end of the identification period), B is to identify replacement
property that is of a like kind to real property X. On or before
November 13, 1991 (the end of the exchange period), C is required to
purchase the property identified by B and to transfer that property
to B. To the extent the fair market value of the replacement property
transferred to B is greater or less than the fair market value
property X, either B or C, as applicable, will make up the difference
by paying cash to the other party after the date the replacement
property is received by B. The replacement property is identified as
provided in paragraph (c) of this section (relating to identification
of replacement property) and is of a like kind to real property X
(determined without regard to section 1031(a)(3) and this section). B
intends to hold any replacement property received for investment.
EXAMPLE 1.
(i) On May 17, 1991, B transfers real property X to C. On
the same day, C pays $10,000 to B and deposits $90,000 in
escrow as security for C's obligation to perform under the
agreement. The escrow agreement provides that B has no
rights to receive, pledge, borrow, or otherwise obtain the
benefits of the money in escrow before November 14, 1991,
except that:
(A) if B fails to identify replacement property on or
before July 1, 1991, B may demand the funds in escrow
at any time after July 1, 1991; and
(B) if B identifies and receives replacement property,
then B may demand the balance of the remaining funds
in escrow at any time after B has received the
replacement property.
The funds in escrow may be used to purchase the replacement
property. The escrow holder is not a disqualified person as
defined in paragraph (k) of this section. Pursuant to the terms
of the agreement, B identifies replacement property, and C
purchases the replacement property using the funds in escrow and
tranfers the replacement property to B.
(ii) C's obligation to transfer the replacement property to B
was secured by cash held in a qualified escrow account because
the escrow holder was not a disqualified person and the escrow
agreement expressly limited B's rights to receive, pledge,
borrow, or otherwise obtain the benefits of the money in escrow
as provided in paragraph (g)(6) of this section. In addition, B
did not have the immediate ability or unrestricted right to
receive money or other property in escrow before B actually
received the like-kind replacement property. Therefore, for
purposes of section 1031 and this section, B is determined not
to be in actual or constructive receipt of the $90,000 held in
escrow before B received the like-kind replacement property. The
transfer of real property X by B and B's acquisition of the
replacement property qualify as an exchange under section 1031.
See paragraph (j) of this section for determining the amount of
gain or loss recognized.
EXAMPLE 2.
(i) On May 17, 1991, B transfers real property X to C, and
C deposits $100,000 in escrow as security for C's
obligation to perform under the agreement. Also on May 17,
B identifies real property J as replacement property. The
escrow agreement provides that no funds may be paid out
without prior written approval of both B and C. The escrow
agreement also provides that B has no rights to receive,
pledge, borrow, or otherwise obtain the benefits of the
money in escrow before November 14, 1991, except that:
(A) B may demand the funds in escrow at any time after
the later of July 1, 1991, and the occurrence of any
of the following events--
(1) real property J is destroyed, seized,
requisitioned, or condemned, or
(2) a determination is made that the regulatory
approval necessary for the transfer of real
property J cannot be obtained in time for real
property J to be transferred to B before the end
of the exchange period;
(B) B may demand the funds in escrow at any time after
August 14, 1991, if real property J has not been
rezoned from residential to commercial use by that
date; and
(C) B may demand the funds in escrow at the time B
receives real property J or any time thereafter.
Otherwise, B is entitled to all funds in escrow after
November 13, 1991. The funds in escrow may be used to
purchase the replacement property. The escrow holder
is not a disqualified person as described in paragraph
(k) of this section. Real property J is not rezoned
from residential to commercial use on or before August
14, 1991.
(ii) C's obligation to transfer the replacement property to
B was secured by cash held in a qualified escrow account
because the escrow holder was not a disqualified person and
the escrow agreement expressly limited B's rights to
receive, pledge, borrow, or otherwise obtain the benefits
of the money in escrow as provided in paragraph (g)(6) of
this section. From May 17, 1991, until August 15, 1991, B
did not have the immediate ability or unrestricted right to
receive money or other property before B actually received
the like-kind replacement property. Therefore, for purposes
of section 1031 and this section, B is determined not to be
in actual or constructive receipt of the $100,000 in escrow
from May 17, 1991, until August 15, 1991. However, on
August 15, 1991, B had the unrestricted right, upon notice,
to draw upon the $100,000 held in escrow. Thus, the safe
harbor ceased to apply and B was in constructive receipt of
the funds held in escrow. Because B constructively received
the full amount of the consideration ($100,000) before B
actually received the like-kind replacement property, the
transaction is treated as a sale and not as a deferred
exchange. The result does not change even if B chose not to
demand the funds in escrow and continued to attempt to have
real property J rezoned and to receive the property on or
before November 13, 1991.
(iii) If real property J had been rezoned on or before
August 14, 1991, and C had purchased real property J and
transferred it to B on or before November 13, 1991, the
transaction would have qualified for nonrecognition of gain
or loss under section 1031(a).
EXAMPLE 3.
(i) On May 1, 1991, D offers to purchase real property X
for $100,000. However, D is unwilling to participate in a
like-kind exchange. B thus enters into an exchange
agreement with C whereby B retains C to facilitate an
exchange with respect to real property X. C is not a
disqualified person as described in paragraph (k) of this
section. The exchange agreement between B and C provides
that B is to execute and deliver a deed conveying real
property X to C who, in turn, is to execute and deliver a
deed conveying real property X to D. The exchange agreement
expressly limits B's rights to receive, pledge, borrow, or
otherwise obtain the benefits of money or other property
held by C as provided in paragraph (g)(6) of this section.
On May 3, 1991, C enters into an agreement with D to
transfer real property X to D for $100,000. On May 17,
1991, B executes and delivers to C a deed conveying real
property X to C. On the same date, C executes and delivers
to D a deed conveying real property X to D, and D deposits
$100,000 in escrow. The escrow holder is not a disqualified
person as defined in paragraph (k) of this section and the
escrow agreement expressly limits B's rights to receive,
pledge, borrow, or otherwise obtain the benefits of money
or other property in escrow as provided in paragraph (g)(6)
of this section. However, the escrow agreement provides
that the money in escrow may be used to purchase
replacement property. On June 3, 1991, B identifies real
property K as replacement property. On August 9, 1991, E
executes and delivers to C a deed conveying real property K
to C and $80,000 is released from the escrow and paid to E.
On the same date, C executes and delivers to B a deed
conveying real property K to B, and the escrow holder pays
B $20,000, the balance of the $100,000 sale price of real
property X remaining after the purchase of real property K
for $80,000.
(ii) B and C entered into an exchange agreement that
satisfied the requirements of paragraph (g)(4)(iii)(B) of
this section. Regardless of whether C may have acquired and
transferred real property X under general tax principles, C
is treated as having acquired and transferred real property
X because C acquired and transferred legal title to real
property X. Similarly, C is treated as having acquired and
transferred real property K because C acquired and
transferred legal title to real property K. Thus, C was a
qualified intermediary. This result is reached for purposes
of this section regardless of whether C was B's agent under
state law.
(iii) Because the escrow holder was not a disqualified
person and the escrow agreement expressly limited B's
rights to receive, pledge, borrow, or otherwise obtain the
benefits of money or other property in escrow as provided
in paragraph (g)(6) of this section, the escrow account was
a qualified escrow account. For purposes of section 1031
and this section, therefore, B is determined not to be in
actual or constructive receipt of the funds in escrow
before B received real property K.
(iv) The exchange agreement between B and C expressly
limited B's rights to receive, pledge, borrow, or otherwise
obtain the benefits of any money held by C as provided in
paragraph (g)(6) of this section. Because C was a qualified
intermediary, for purposes of section 1031 and this section
B is determined not to be in actual or constructive receipt
of any funds held by C before B received real property K.
In addition, B's transfer of real property X and
acquisition of real property K qualify as an exchange under
section 1031. See paragraph (j) of this section for
determining the amount of gain or loss recognized.
(v) If the escrow agreement had expressly limited C's
rights to receive, pledge, borrow, or otherwise obtain the
benefits of money or other property in escrow as provided
in paragraph (g)(6) of this section, but had not expressly
limited B's rights to receive, pledge, borrow, or otherwise
obtain the benefits of that money or other property, the
escrow account would not have been a qualified escrow
account. Consequently, paragraph (g)(3)(i) of this section
would not have been applicable in determining whether B was
in actual or constructive receipt of that money or other
property before B received real property K.
EXAMPLE 4.
(i) On May 1, 1991, B enters into an agreement to sell real
property X to D for $100,000 on May 17, 1991. However, D is
unwilling to participate in a like-kind exchange. B thus
enters into an exchange agreement with C whereby B retains
C to facilitate an exchange with respect to real property
X. C is not a disqualified person as described in paragraph
(k) of this section. In the exchange agreement between B
and C, B assigns to C all of B's rights in the agreement
with D. The exchange agreement expressly limits B's rights
to receive, pledge, borrow, or otherwise obtain the
benefits of money or other property held by C as provided
in paragraph (g)(6) of this section. On May 17, 1991, B
notifies D in writing of the assignment. On the same date,
B executes and delivers to D a deed conveying real property
X to D. D pays $10,000 to B and $90,000 to C. On June 1,
1991, B identifies real property L as replacement property.
On July 5, 1991, B enters into an agreement to purchase
real property L from E for $90,000, assigns its rights in
that agreement to C, and notifies E in writing of the
assignment. On August 9, 1991, C pays $90,000 to E, and E
executes and delivers to B a deed conveying real property L
to B.
(ii) The exchange agreement entered into by B and C
satisfied the requirements of paragraph (g)(4)(iii)(B) of
this section. Because B's rights in its agreements with D
and E were assigned to C, and D and E were notified in
writing of the assignment on or before the transfer of real
properties X and L, respectively, C is treated as entering
into those agreements. Because C is treated as entering
into an agreement with D for the transfer of real property
X and, pursuant to that agreement, real property X was
transferred to D, C is treated as acquiring and
transferring real property X. Similarly, because C is
treated as entering into an agreement with E for the
transfer of real property K and, pursuant to that
agreement, real property K was transferred to B, C is
treated as acquiring and transferring real property K. This
result is reached for purposes of this section regardless
of whether C was B's agent under state law and regardless
of whether C is considered, under general tax principles,
to have acquired title or beneficial ownership of the
properties. Thus, C was a qualified intermediary.
(iii) The exchange agreement between B and C expressly
limited B's rights to receive, pledge, borrow, or otherwise
obtain the benefits of the money held by C as provided in
paragraph (g)(6) of this section. Thus, B did not have the
immediate ability or unrestricted right to receive money or
other property held by C before B received real property L.
For purposes of section 1031 and this section, therefore, B
is determined not to be in actual or constructive receipt
of the $90,000 held by C before B received real property L.
In addition, the transfer of real property X by B and B's
acquisition of real property L qualify as an exchange under
section 1031. See paragraph (j) of this section for
determining the amount of gain or loss recognized.
EXAMPLE 5.
(i) On May 1, 1991, B enters into an agreement to sell real
property X to D for $100,000. However, D is unwilling to
participate in a like-kind exchange. B thus enters into an
agreement with C whereby B retains C to facilitate an
exchange with respect to real property X. C is not a
disqualified person as described in paragraph (k) of this
section. The agreement between B and C expressly limits B's
rights to receive, pledge, borrow, or otherwise obtain the
benefits of money or other property held by C as provided
in paragraph (g)(6) of this section. C neither enters into
an agreement with D to transfer real property X to D nor is
assigned B's rights in B's agreement to sell real property
X to D. On May 17, 1991, B transfers real property X to D
and instructs D to transfer the $100,000 to C. On June 1,
1991, B identifies real property M as replacement property.
On August 9, 1991, C purchases real property L from E for
$100,000, and E executes and delivers to C a deed conveying
real property M to C. On the same date, C executes and
delivers to B a deed conveying real property M to B.
(ii) Because B transferred real property X directly to D
under B's agreement with D, C did not acquire real property
X from B and transfer real property X to D. Moreover,
because C did not acquire legal title to real property X,
did not enter into an agreement with D to transfer real
property X to D, and was not assigned B's rights in B's
agreement to sell real property X to D, C is not treated as
acquiring and transferring real property X. Thus, C was not
a qualified intermediary and paragraph (g)(4))(i) of this
section does not apply.
(iii) B did not exchange real property X for real property
M. Rather, B sold real property X to D and purchased,
through C, real property M. Therefore, the transfer of real
property X does not qualify for nonrecognition of gain or
loss under section 1031.
(h) INTEREST AND GROWTH FACTORS--
(1) IN GENERAL. For purposes of this section, the taxpayer is treated
as being entitled to receive interest or a growth factor with respect
to a deferred exchange if the amount of money or property the
taxpayer is entitled to receive depends upon the length of time
elapsed between transfer of the relinquished property and receipt of
the replacement property.
(2) TREATMENT AS INTEREST. If, as part of a deferred exchange, the
taxpayer receives interest or a growth factor, the interest or growth
factor will be treated as interest, regardless of whether it is paid
to the taxpayer in cash or in property (including property of a like
kind). The taxpayer must include the interest or growth factor in
income according to the taxpayer's method of accounting.
(i) [Reserved]
(j) DETERMINATION OF GAIN OR LOSS RECOGNIZED AND THE BASIS OF PROPERTY
RECEIVED IN A DEFERRED EXCHANGE--
(1) IN GENERAL. Except as otherwise provided, the amount of gain or
loss recognized and the basis of property received in a deferred
exchange is determined by applying the rules of section 1031 and the
regulations thereunder. See Sections 1.1031(b)-1, 1.1031(c)-1,
1.1031(d)-1, 1.1031(d)-1T, 1.1031(d)-2, and 1.1031(j)-1.
(2) COORDINATION WITH SECTION 453--
(i) QUALIFIED ESCROW ACCOUNTS AND QUALIFIED TRUSTS. Subject to
the limitations of paragraphs (j)(2)(iv) and (v) of this
section, in the case of a taxpayer's transfer of relinquished
property in which the obligation of the taxpayer's transferee to
transfer replacement property to the taxpayer is or may be
secured by cash or a cash equivalent, the determination of
whether the taxpayer has received a payment for purposes of
section 453 and section 15a.453-1(b)(3)(i) of this chapter will
be made without regard to the fact that the obligation is or may
be so secured if the cash or cash equivalent is held in a
qualified escrow account or a qualified trust. This paragraph
(j)(2)(i) ceases to apply at the earlier of--
(A) The time described in paragraph (g)(3)(iv) of this
section; or
(B) The end of the exchange period.
(ii) QUALIFIED INTERMEDIARIES. Subject to the limitations of
paragraphs (j)(2)(iv) and (v) of this section, in the case of a
taxpayer's transfer of relinquished property involving a
qualified intermediary, the determination of whether the
taxpayer has received a payment for purposes of section 453 and
section 15a.453-1(b)(3)(i) of this chapter is made as if the
qualified intermediary is not the agent of the taxpayer. For
purposes of this paragraph (j)(2)(ii), a person who otherwise
satisfies the definition of a qualified intermediary is treated
as a qualified intermediary even though that person ultimately
fails to acquire identified replacement property and transfer it
to the taxpayer. This paragraph (j)(2)(ii) ceases to apply at
the earlier of--
(A) The time described in paragraph (g)(4)(vi) of this
section; or
(B) The end of the exchange period.
(iii) TRANSFEREE INDEBTEDNESS. In the case of a transaction
described in paragraph (j)(2)(ii) of this section, the receipt
by the taxpayer of an evidence of indebtedness of the transferee
of the qualified intermediary is treated as the receipt of an
evidence of indebtedness of the person acquiring property from
the taxpayer for purposes of section 453 and section
15a.453-1(b)(3)(i) of this chapter.
(iv) BONA FIDE INTENT REQUIREMENT. The provisions of paragraphs
(j)(2)(i) and (ii) of this section do not apply unless the
taxpayer has a bona fide intent to enter into a deferred
exchange at the beginning of the exchange period. A taxpayer
will be treated as having a bona fide intent only if
itrecognition of gain or loss under section 1031.
(h) INTEREST AND GROWTH FACTORS--
(1) IN GENERAL. For purposes of this section, the taxpayer is treated
as being entitled to receive interest or a growth factor with respect
to a deferred exchange if the amount of money or property the
taxpayer is entitled to receive depends upon the length of time
elapsed between transfer of the relinquished property and receipt of
the replacement property.
(2) TREATMENT AS INTEREST. If, as part of a deferred exchange, the
taxpayer receives interest or a growth factor, the interest or growth
factor will be treated as interest, regardless of whether it is paid
to the taxpayer in cash or in property (including property of a like
kind). The taxpayer must include the interest or growth factor in
income according to the taxpayer's method of accounting.
(i) [Reserved]
(j) DETERMINATION OF GAIN OR LOSS RECOGNIZED AND THE BASIS OF PROPERTY
RECEIVED IN A DEFERRED EXCHANGE--
(1) IN GENERAL. Except as otherwise provided, the amount of gain or
loss recognized and the basis of property received in a deferred
exchange is determined by applying the rules of section 1031 and the
regulations thereunder. See Sections 1.1031(b)-1, 1.1031(c)-1,
1.1031(d)-1, 1.1031(d)-1T, 1.1031(d)-2, and 1.1031(j)-1.
(2) COORDINATION WITH SECTION 453--
(i) QUALIFIED ESCROW ACCOUNTS AND QUALIFIED TRUSTS. Subject to
the limitations of paragraphs (j)(2)(iv) and (v) of this
section, in the case of a taxpayer is reasonable to believe,
based on all the facts and circumstances as of the beginning of
the exchange period, that like-kind replacement property will be
acquired before the end of the exchange period.
(v) DISQUALIFIED PROPERTY. The provisions of paragraphs
(j)(2)(i) and (ii) of this section do not apply if the
relinquished property is disqualified property. For purposes of
this paragraph (j)(2), disqualified property means property that
is not held for productive use in a trade or business or for
investment or is property described in section 1031(a)(2).
(vi) EXAMPLES. This paragraph (j)(2) may be illustrated by the
following examples. Unless otherwise provided in an example, the
following facts are assumed: B is a calendar year taxpayer who
agrees to enter into a deferred exchange. Pursuant to the
agreement, B is to transfer real property X. Real property X,
which has been held by B for investment, is unencumbered and has
a fair market value of $100,000 at the time of transfer. B's
adjusted basis in real property X at that time is $60,000. B
identifies a single like-kind replacement property before the
end of the identification period, and B receives the replacement
property before the end of the exchange period. The transaction
qualifies as a like-kind exchange under section 1031.
EXAMPLE 1.
(i) On September 22, 1994, B transfers real property X
to C and C agrees to acquire like-kind property and
deliver it to B. On that date B has a bona fide intent
to enter into a deferred exchange. C's obligation,
which is not payable on demand or readily tradable, is
secured by $100,000 in cash. The $100,000 is deposited
by C in an escrow account that is a qualified escrow
account under paragraph (g)(3) of this section. The
escrow agreement provides that B has no rights to
receive, pledge, borrow, or otherwise obtain the
benefits of the cash deposited in the escrow account
until the earlier of the date the replacement property
is delivered to B or the end of the exchange period.
On March 11, 1995, C acquires replacement property
having a fair market value of $80,000 and delivers the
replacement property to B. The $20,000 in cash
remaining in thhat B has no rights to receive, pledge,
borrow, or otherwise obtain the benefits of the money
held by C until the earlier of the date the
replacement property is delivered to B or the end of
the exchange period. On March 11, 1995, C acquires
replacement property having a fair market value of
$80,000 and delivers it, along with the remaining
$20,000 from the transfer of real property X, to B.
(ii) Under section 1031(b), B recognizes gain to the
extent of the $20,000 cash B receives in the exchange.
Under paragraph (j)(2)(ii) of this section, any agency
relationship between B and C is disregarded for
purposes of section 453 and section 15a.453-1(b)(3)(i)
of this chapter in determining whether B is in receipt
of payment. Accordingly, B is not treated as having
received payment on September 22, 1994, on C's receipt
of payment from D for the relinquished property.
Instead, B is treated as receiving payment on March
11, 1995, on receipt of the $20,000 in cash from C.
Subject to the other requirements of sections 453 and
453A, B may report the $20,000 gain in 1995 under the
installment method.
EXAMPLE 3.
(i) D offers to purchase real property X but is
unwilling to participate in a like-kind exchange. B
enters into an exchange agreement with C whereby B
retains C as a qualified intermediary to facilitate an
exchange with respect to real property X. On December
1, 1994, pursuant to the agreement, B transfers real
property X to C who transfers it to D for $100,000 in
cash. On that date B has a bona fide intent to enter
into a deferred exchange. The exchange agreement
provides that B has no rights to receive, pledge,
borrow, or otherwise obtain the benefits of the cash
held by C until the earliest of the end of the
identification period if B has not identified
replacement property, the date the replacement
property is delivered to B, or the end of the exchange
period. Although B has a bona fide intent to enter
into a deferred exchange at the beginning of the
exchange period, B does not identify or acquire any
replacement property. In 1995, at the end of the
identification period, C delivers the entire $100,000
from the sale of real property X to B.
(ii) Under section 1001, B realizes gain to the extent
of the amount realized ($100,000) over the adjusted
basis in real property X ($60,000), or $40,000.
Because B has a bona fide intent at the beginning of
the exchange period to enter into a deferred exchange,
paragraph (j)(2)(iv) of this section does not make
paragraph (j)(2)(ii) of this section inapplicable even
though B fails to acquire replacement property.
Further, under paragraph (j)(2)(ii) of this section, C
is a qualified intermediary even though C does not
acquire and transfer replacement property to B. Thus,
any agency relationship between B and C is disregarded
for purposes of section 453 and section
15a.453-1(b)(3)(i) of this chapter in determining
whether B is in receipt of payment. Accordingly, B is
not treated as having received payment on December 1,
1994, on C's receipt of payment from D for the
relinquished property. Instead, B is treated as
receiving payment at the end of the identification
period in 1995 on receipt of the $100,000 in cash from
C. Subject to the other requirements of sections 453
and 453A, B may report the $40,000 gain in 1995 under
the installment method.
EXAMPLE 4.
(i) D offers to purchase real property X but is
unwilling to participate in a like-kind exchange. B
thus enters into an exchange agreement with C whereby
B retains C to facilitate an exchange with respect to
real property X. C is a qualified intermediary under
paragraph (g)(4) of this section. On September 22,
1994, pursuant to the agreement, B transfers real
property X to C who then transfers it to D for $80,000
in cash and D's 10-year installment obligation for
$20,000. On that date B has a bona fide intent to
enter into a deferred exchange. The exchange agreement
provides that B has no rights to receive, pledge,
borrow, or otherwise obtain the benefits of the money
or other property held by C until the earlier of the
date the replacement property is delivered to B or the
end of the exchange period. D's obligation bears
adequate stated interest and is not payable on demand
or readily tradable. On March 11, 1995, C acquires
replacement property having a fair market value of
$80,000 and delivers it, along with the $20,000
installment obligation, to B.
(ii) Under section 1031(b), $20,000 of B's gain (i.e.,
the amount of the installment obligation B receives in
the exchange) does not qualify for nonrecognition
under section 1031(a). Under paragraphs (j)(2)(ii) and
(iii) of this section, B's receipt of D's obligation
is treated as the receipt of an obligation of the
person acquiring the property for purposes of section
453 and section 15a.453-1(b)(3)(i) of this chapter in
determining whether B is in receipt of payment.
Accordingly, B's receipt of the obligation is not
treated as a payment. Subject to the other
requirements of sections 453 and 453A, B may report
the $20,000 gain under the installment method on
receiving payments from D on the obligation.
EXAMPLE 5.
(i) B is a corporation that has held real property X
to expand its manufacturing operations. However, at a
meeting in November 1994, B's directors decide that
real property X is not suitable for the planned
expansion, and authorize a like-kind exchange of this
property for property that would be suitable for the
planned expansion. B enters into an exchange agreement
with C whereby B retains C as a qualified intermediary
to facilitate an exchange with respect to real
property X. On November 28, 1994, pursuant to the
agreement, B transfers real property X to C, who then
transfers it to D for $100,000 in cash. The exchange
agreement does not include any limitations or
conditions that make it unreasonable to believe that
like-kind replacement property will be acquired before
the end of the exchange period. The exchange agreement
provides that B has no rights to receive, pledge,
borrow, or otherwise obtain the benefits of the cash
held by C until the earliest of the end of the
identification period, if B has not identified
replacement property, the date the replacement
property is delivered to B-, or the end of the
exchange period. In early January 1995, B's directors
meet and decide that it is not feasible to proceed
with the planned expansion due to a business downturn
reflected in B's preliminary financial reports for the
last quarter of 1994. Thus, B's directors instruct C
to stop seeking replacement property. C delivers the
$100,000 cash to B on January 12, 1995, at the end of
the identification period. Both the decision to
exchange real property X for other property and the
decision to cease seeking replacement property because
of B's business downturn are recorded in the minutes
of the directors' meetings. There are no other facts
or circumstances that would indicate whether, on
November 28, 1994, B had a bona fide intent to enter
into a deferred like-kind exchange.
(ii) Under section 1001, B realizes gain to the extent
of the amount realized ($100,000) over the adjusted
basis of real property X ($60,000), or $40,000. The
directors' authorization of a like-kind exchange, the
terms of the exchange agreement with C, and the
absence of other relevant facts, indicate that B had a
bona fide intent at the beginning of the exchange
period to enter into a deferred like-kind exchange.
Thus, paragraph (j)(2)(iv) of this section does not
make paragraph (j)(2)(ii) of this section
inapplicable, even though B fails to acquire
replacement property. Further, under paragraph
(j)(2)(ii) of this section, C is a qualified
intermediary, even though C does not transfer
replacement property to B. Thus, any agency
relationship between B and C is disregarded for
purposes of section 453 and section 15a.453-1(b)(3)(i)
of this chapter in determining whether B is in receipt
of payment. Accordingly, B is not treated as having
received payment until January 12, 1995, on receipt of
the $100,000 cash from C. Subject to the other
requirements of sections 453 and 453A, B may report
the $40,000 gain in 1995 under the installment method.
EXAMPLE 6.
(i) B has held real property X for use in its trade or
business, but decides to transfer that property
because it is no longer suitable for B's planned
expansion of its commercial enterprise. B and D agree
to enter into a deferred exchange. Pursuant to their
agreement, B transfers real property X to D on
September 22, 1994, and D deposits $100,000 cash in a
qualified escrow account as security for D's
obligation under the agreement to transfer replacement
property to B before the end of the exchange period.
D's obligation is not payable on demand or readily
tradable. The agreement provides that B is not
required to accept any property that is not zoned for
commercial use. Before the end of the identification
period, B identifies real properties J, K, and L, all
zoned for residential use, as replacement properties.
Any one of these properties, rezoned for commercial
use, would be suitable for B's planned expansion. In
recent years, the zoning board with jurisdiction over
properties J, K, and L has rezoned similar properties
for commercial use. The escrow agreement provides that
B has no rights to receive, pledge, borrow, or
otherwise obtain the benefits of the money in the
escrow account until the earlier of the time that the
zoning board determines, after the end of the
identification period, that it will not rezone the
properties for commercial use or the end of the
exchange period. On January 5, 1995, the zoning board
decides that none of the properties will be rezoned
for commercial use. Pursuant to the exchange
agreement, B receives the $100,000 cash from the
escrow on January 5, 1995. There are no other facts or
circumstances that would indicate whether, on
September 22, 1994, B had a bona fide intent to enter
into a deferred like-kind exchange.
(ii) Under section 1001, B realizes gain to the extent
of the amount realized ($100,000) over the adjusted
basis of real property X ($60,000), or $40,000. The
terms of the exchange agreement with D, the
identification of properties J, K, and L, the efforts
to have those properties rezoned for commercial
purposes, and the absence of other relevant facts,
indicate that B had a bona fide intent at the
beginning of the exchange period to enter into a
deferred exchange. Moreover, the limitations imposed
in the exchange agreement on acceptable replacement
property do not make it unreasonable to believe that
like-kind replacement property would be acquired
before the end of the exchange period. Therefore,
paragraph (j)(2)(iv) of this section does not make
paragraph (j)(2)(i) of this section inapplicable even
though B fails to acquire replacement property. Thus,
for purposes of section 453 and section
15a.453-1(b)(3)(i) of this chapter, the qualified
escrow account is disregarded in determining whether B
is in receipt of payment. Accordingly, B is not
treated as having received payment on September 22,
1994, on D's deposit of the $100,000 cash into the
qualified escrow account. Instead, B is treated as
receiving payment on January 5, 1995. Subject to the
other requirements of sections 453 and 453A, B may
report the $40,000 gain in 1995 under the installment
method.
(vii) EFFECTIVE DATE. This paragraph (j)(2) is effective for
transfers of property occurring on or after April 20, 1994.
Taxpayers may apply this paragraph (j)(2) to transfers of
property occurring before April 20, 1994, but on or after June
10, 1991, if those transfers otherwise meet the requirements of
section 1.1031(k)-1. In addition, taxpayers may apply this
paragraph (j)(2) to transfers of property occurring before June
10, 1991, but on or after May 16, 1990, if those transfers
otherwise meet the requirements of section 1.1031(k)-1 or follow
the guidance of IA-237-84 published in 1990-1, C.B. See section
601.601(d)(2)(ii)(b) of this chapter.
(3) EXAMPLES. This paragraph (j) may be illustrated by the following
examples. Unless otherwise provided in an example, the following
facts are assumed: B, a calendar year taxpayer, and C agree to enter
into a deferred exchange. Pursuant to their agreement, B is to
transfer real property X to C on May 17, 1991. Real property X, which
has been held by B for investment, is unencumbered and has a fair
market value on May 17, 1991, of $100,000. B's adjusted basis in real
property X is $40,000. On or before July 1, 1991 (the end of the
identification period), B is to identify replacement property that is
of a like kind to real property X. On or before November 13, 1991
(the end of the exchange period), C is required to purchase the
property identified by B and to transfer that property to B. To the
extent the fair market value of the replacement property transferred
to B is greater or less than the fair market value of real property
X, either B or C, as applicable, will make up the difference by
paying cash to the other party after the date the replacement
property is received. The replacement property is identified as
provided in paragraph (c) of this section and is of a like kind to
real property X (determined without regard to section 1031(a)(3) and
this section). B intends to hold any replacement property received
for investment.
EXAMPLE 1.
(i) On May 17, 1991, B transfers real property X to C and
identifies real property R as replacement property. On June
3, 1991, C transfers $10,000 to B. On September 4, 1991, C
purchases real property R for $90,000 and transfers real
property R to B.
(ii) The $10,000 received by B is "money or other property"
for purposes of section 1031 and the regulations
thereunder. Under section 1031(b), B recognizes gain in the
amount of $10,000. Under section 1031(d), B's basis in real
property R is $40,000 (i.e., B's basis in real property X
($40,000), decreased in the amount of money received
($10,000), and increased in the amount of gain recognized
($10,000) in the deferred exchange).
EXAMPLE 2.
(i) On May 17, 1991, B transfers real property X to C and
identifies real property S as replacement property, and C
transfers $10,000 to B. On September 4, 1991, C purchases
real property S for $100,000 and transfers real property S
to B. On the same day, B transfers $10,000 to C.
(ii) The $10,000 received by B is "money or other property"
for purposes of section 1031 and the regulations
thereunder. Under section 1031(b), B recognizes gain in the
amount of $10,000. Under section 1031(d), B's basis in real
property S is $50,000 (i.e., B's basis in real property X
($40,000), decreased in the amount of money received
($10,000), increased in the amount of gain recognized
($10,000), and increased in the amount of the additional
consideration paid by B ($10,000) in the deferred
exchange).
EXAMPLE 3.
(i) Under the exchange agreement, B has the right at all
times to demand $100,000 in cash in lieu of replacement
property. On May 17, 1991, B transfers real property X to C
and identifies real property T as replacement property. On
September 4, 1991, C purchases real property T for $100,000
and transfers real property T to B.
(ii) Because B has the right on May 17, 1991, to demand
$100,000 in cash in lieu of replacement property, B is in
constructive receipt of the $100,000 on that date. Thus,
the transaction is a sale and not an exchange, and the
$60,000 gain realized by B in the transaction (i.e.,
$100,000 amount realized less $40,000 adjusted basis) is
recognized. Under section 1031(d), B's basis in real
property T is $100,000.
EXAMPLE 4.
(i) Under the exchange agreement, B has the right at all
times to demand up to $30,000 in cash and the balance in
replacement propertry instead of receiving replacement
property in the amount of $100,000. On May 17, 1991, B
transfers real property X to C and identifies real property
U as replacement property. On September 4, 1991, C
purchases real property U for $100,000 and transfers real
property U to B.
(ii) The transaction qualifies as a deferred exchange under
section 1031 and this section. However, because B had the
right on May 17, 1991, to demand up to $30,000 in cash, B
is in constructive receipt of $30,000 on that date. Under
section 1031(b), B recognizes gain in the amount of
$30,000. Under section 1031(d), B's basis in real property
U is $70,000 (i.e., B's basis in real property X ($40,000),
decreased in the amount of money that B received ($30,000),
increased in the amount of gain recognized ($30,000), and
increased in the amount of additional consideration paid by
B ($30,000) in the deferred exchange).
EXAMPLE 5.
(i) Assume real property X is encumbered by a mortgage of
$30,000. On May 17, 1991, B transfers real property X to C
and identifies real property V as replacement property, and
C assumes the $30,000 mortgage on real property X. Real
property V is encumbered by a $20,000 mortgage. On July 5,
1991, C purchases real property V for $90,000 by paying
$70,000 and assuming the mortgage and transfers real
property V to B with B assuming the mortgage.
(ii) The consideration received by B in the form of the
liability assumed by C ($30,000) is offset by the
consideration given by B in the form of the liability
assumed by B ($20,000). The excess of the liability assumed
by C over the liability assumed by B, $10,000, is treated
as "money or other property." See Section 1.1031(b)-1(c).
Thus, B recognizes gain under section 1031(b) in the amount
of $10,000. Under section 1031(d), B's basis in real
property V is $40,000 (i.e., B's basis in real property X
($40,000), decreased in the amount of money that B is
treated as receiving in the form of the liability assumed
by C ($30,000), increased in the amount of money that B is
treated as paying in the form of the liability assumed by B
($20,000), and increased in the amount of the gain
recognized ($10,000) in the deferred exchange).
(k) DEFINITION OF DISQUALIFIED PERSON.
(1) For purposes of this section, a disqualified person is a person
described in paragraph (k)(2), (k)(3), or (k)(4) of this section.
(2) The person is the agent of the taxpayer at the time of the
transaction. For this purpose, a person who has acted as the
taxpayer's employee, attorney, accountant, investment banker or
broker, or real estate agent or broker within the 2-year period
ending on the date of the transfer of the first of the relinquished
properties is treated as an agent of the taxpayer at the time of the
transaction. Solely for purposes of this paragraph (k)(2),
performance of the following services will not be taken into
account--
(i) Services for the taxpayer with respect to exchanges of
property intended to qualify for nonrecognition of gain or loss
under section 1031; and
(ii) Routine financial, title insurance, escrow, or trust
services for the taxpayer by a financial institution, title
insurance company, or escrow company.
(3) The person and the taxpayer bear a relationship described in
either section 267(b) or section 707(b) (determined by substituting
in each section "10 percent" for "50 percent" each place it appears).
(4) The person and a person described in paragraph (k)(2) of this
section bear a relationship described in either section 267(b) or
section 707(b) (determined by substituting in each section "10
percent" for "50 percent" each place it appears).
(5) This paragraph (k) may be illustrated by the following examples.
Unless otherwise provided, the following facts are assumed: On May 1,
1991, B enters into an exchange agreement (as defined in paragraph
(g)(4)(iii)(B) of this section) with C whereby B retains C to
facilitate an exchange with respect to real property X. On May 17,
1991, pursuant to the agreement, B executes and delivers to C a deed
conveying real property X to C. C has no relationship to B described
in paragraphs (k)(2), (k)(3), or (k)(4) of this section.
EXAMPLE 1.
(i) C is B's accountant and has rendered accounting
services to B within the 2-year period ending on May 17,
1991, other than with respect to exchanges of property
intended to qualify for nonrecognition of gain or loss
under section 1031.
(ii) C is a disqualified person because C has acted as B's
accountant within the 2-year period ending on May 17, 1991.
(iii) If C had not acted as B's accountant within the
2-year period ending on May 17, 1991, or if C had acted as
B's accountant within that period only with respect to
exchanges intended to qualify for nonrecognition of gain or
loss under section 1031, C would not have been a
disqualified person.
EXAMPLE 2.
(i) C, which is engaged in the trade or business of acting
as an intermediary to facilitate deferred exchanges, is a
wholly owned subsidiary of an escrow company that has
performed routine escrow services for B in the past. C has
previously been retained by B to act as an intermediary in
prior section 1031 exchanges.
(ii) C is not a disqualified person notwithstanding the
intermediary services previously provided by C to B (see
paragraph (k)(2)(i) of this section) and notwithstanding
the combination of C's relationship to the escrow company
and the escrow services previously provided by the escrow
company to B (see paragraph (k)(2)(ii) of this section).
EXAMPLE 3.
(i) C is a corporation that is only engaged in the trade or
business of acting as an intermediary to facilitate
deferred exchanges. Each of 10 law firms owns 10 percent of
the outstanding stock of C. One of the 10 law firms that
owns 10 percent of C is M. J is the managing partner of M
and is the president of C. J, in his capacity as a partner
in M, has also rendered legal advice to B within the 2-year
period ending on May 17, 1991, on matters other than
exchanges intended to qualify for nonrecognition of gain or
loss under section 1031.
(ii) J and M are disqualified persons. C, however, is not a
disqualified person because neither J nor M own, directly
or indirectly, more than 10 percent of the stock of C.
Similarly, J's participation in the management of C does
not make C a disqualified person.
(l) [Reserved]
(m) DEFINITION OF FAIR MARKET VALUE. For purposes of this section, the
fair market value of property means the fair market value of the property
without regard to any liabilities secured by the property.
(n) NO INFERENCE WITH RESPECT TO ACTUAL OR CONSTRUCTIVE RECEIPT RULES
OUTSIDE OF SECTION 1031. The rules provided in this section relating to
actual or constructive receipt are intended to be rules for determining
whether there is actual or constructive receipt in the case of a deferred
exchange. No inference is intended regarding the application of these
rules for purposes of determining whether actual or constructive receipt
exists for any other purpose.
(o) EFFECTIVE DATE. This section applies to transfers of property made by
a taxpayer on or after June 10, 1991. However, a transfer of property made
by a taxpayer on or after May 16, 1990, but before June 10, 1991, will be
treated as complying with section 1031(a)(3) and this section if the
deferred exchange satisfies either the provision of this section or the
provisions of the notice of proposed rulemaking published in the FEDERAL
REGISTER on May 16, 1990 (55 FR 20278).
[T.D. 8346, 56 FR 19938, May 1, 1991, T.D. 8535, 59 FR 18747, April 20,
1994]
