Question: Luke owns a rental house two miles from his home. He decided to move and decided it would be best to sell the rental property and buy a different rental house closer to his new home. He found another property and all of the requirements to qualify for a like-kind exchange under §1031 were met as part of the transaction. There were no related parties involved in the transaction. However, after doing some tax planning, Luke has realized that he will be in a lower tax bracket during the year of the transaction than when he eventually sells the newly acquired rental home. Therefore, he does not want to defer the gain so he can pay the tax while he is still in a lower tax bracket. Can Luke opt to treat this sale of the property as fully taxable even though he meets all the requirements for treating the transaction as a like-kind exchange?
Answer: No. If the §1031 like-kind exchange requirements are satisfied, then the nontaxable exchange treatment is mandatory. All of the following requirements must be met in order to require the §1031 treatment:
- The transaction is in the form of a sale or exchange
- The property transferred and the property received are both held for productive use in the taxpayer’s trade or business or are for investment
- The properties transferred and received meet the definition of like-kind property
If Luke did not want the §1031 like-kind exchange provisions to apply, then he would have needed to structure the transaction in a way that failed to meet the like-kind exchange requirements.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.