First Page
407
Abstract
Section 1031 is the most widely used transactional tax-planning tool in federal income tax law. It allows owners of real property to transfer their property and acquire like-kind real property without recognizing taxable gain. Yet one of its most fundamental elements—the exchange requirement—remains under-analyzed and widely misunderstood, with costly consequences to untold numbers of taxpayers every year. Inaccurate information regarding the exchange requirement is disseminated to property owners by advisors and exchange professionals, causing property owners to forego business and transactional opportunities. Other property owners pay for costly transactional planning at the urging of advisors who misunderstand the exchange requirement. Thus, the section 1031 exchange requirement is in desperate need of in-depth analysis and clarification. This Article applies in-depth analysis to demystify the exchange requirement. The resulting clarity will relieve property owners of costs resulting from lost opportunities and expensive transactional planning. The costly pressure points related to the exchange requirement are most pronounced with exchanges that commonly occur (or would occur more commonly with a clear understanding of the exchange requirement) in proximity to tax-free business transactions (i.e., contributions to and distributions from entities). This Article draws from legislation, legislative history, case law, IRS guidance, and tax policy to show that the exchange requirement attracts a form-driven analysis, which deviates from the standard substance-over-form analyses that apply to most federal income tax issues. The Article shows that courts deliberately adopt the form-driven analysis and shun substance-over-form analyses because the latter fail to provide clarity, and it shows how that analytical framework applies to exchanges that occur in proximity to business transactions. This novel analysis and understanding of the section 1031 exchange requirement provides newfound clarity to judges, advisors, property owners, scholars, and commentators. In doing so, it will free property owners to engage in business transactions confidently, forego costly transactional structures, and thereby increase general economic activity.
Recommended Citation
Bradley T. Borden,
The Section 1031 Exchange Requirement,
18 Brook. J. Corp. Fin. & Com. L.
407
(2024).
Available at:
https://brooklynworks.brooklaw.edu/bjcfcl/vol18/iss2/3