�Tax Free Swaps� Book Now Available
professor Bradley T. Borden, Associate Professor of Law at
University School of Law, and DNA Press have announced the
publication of Tax-Free Swaps: Using Section 1031 Like-Kind
Exchanges to Preserve Investment Net Worth.
the wake of extensive press coverage of section 1031, this timely
publication details the potential benefits, requirements, and scope
of tax-free like-kind exchanges of the Internal Revenue Code. Using
diagrams, practical examples and an easy narrative style, Borden�s
book demystifies like-kind exchanges, making them accessible to all
owners understand that section 1031 provides that no gain or loss is
recognized when a property owner exchanges business-use or
investment property (the �relinquished property�) for like-kind
business-use or investment property (the �replacement property�).
They are not, however, aware of section 1031's scope.
example (typical of those in the book) illustrates the benefits of
section 1031. Tim owns Redstone Apartments, which he purchased for
$100,000, and are now worth $500,000. Ben owns Quarry Warehouse,
which he purchased for $150,000, and now is worth $500,000.
If Tim were to
sell Redstone for cash, he would recognize gain equal to (and would
have to pay tax on) the $400,000 of appreciation. Similarly, if Ben
were to sell Quarry for cash, he would recognize gain equal to (and
would have to pay tax on) the $350,000 of appreciation. If, however,
Tim and Ben both hold their respective properties for business or
investment, they can �swap� properties, under section1031 and avoid
neither would owe any tax on the exchange. Each of them would take a
carry-over basis in his replacement property: Tim would take Quarry
with a $100,000 basis, and Ben would take Redstone�s $150,000 basis.
If either person were to sell his replacement property at a later
date, he would recognize gain equal to�and would pay tax on�the
Either Tim or
Ben could, however, dispose of their replacement properties through
future exchanges. By engaging in serial exchanges, thus deferring
gain recognition and tax indefinitely.
taxpayers who are candidates for this type of direct trade rarely
find one another in the marketplace. More commonly, Tim would want
to sell Redstone to a third party and acquire Quarry from Ben.
Fortunately, in this situation, section 1031 permits Tim to sell
Redstone and to deposit the sale proceeds (often referred to as
exchange funds) with a qualified intermediary.
So long as Tim
meets certain time limits and other restrictions, he could use the
exchange funds to purchase replacement property. This type of
transaction is commonly referred to as a multi-party exchange. If
the transfer and acquisition do not occur simultaneously, the
transaction would be a deferred exchange.
situations, a property owner may not be able to sell relinquished
property before acquiring the replacement property, the property
owner may then benefit from a reverse exchange. If a person doing an
exchange wants to use proceeds from the sale of the relinquished
property to construct improvements on replacement property, an
improvements exchange may be appropriate. The broad scope of section
1031 depicted by these numerous exchange structures is beneficial to
property owners who are aware of their availability.
Swaps� explains the various exchange transactions and identifies
their potential benefits and risks. More importantly, says Christian
Johnson, tax law professor and CPA, �Borden is able to translate
such technical terms as improvements exchange, exchange
accommodation titleholder, and non-safe harbor reverse exchange into
understandable and readable prose.�
information on the publication see