“Tax Free Swaps” Book Now Available

Tax law professor Bradley T. Borden, Associate Professor of Law at

Washburn 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.

Following in 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 taxpayers.

Many property 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.

A simple 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 gain recognition.

Consequently, 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 appreciation.

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.

Of course, 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.

In certain 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.

“Tax-Free 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.”

For more information on the publication see www.dnapress.com.