Section 1250 Property and 1031 Like Kind Exchanges by Denver Tax Attorney

When Section 1250 property is transferred in a 1031 like kind exchange, is there Section 1250 gain from the transaction?  This was a recent research issue I came across, and thought it would make a nice informational article for those considering a 1031 like kind exchange.  Thus, the article below discusses issues related to Section 1250 property and/or 1031 like kind exchanges.

Through a simple definition, Section 1250 property could be considered depreciable real property.  When Section 1250 property is disposed of, say through a sale or exchange, ordinary income can be recognized to the extent of gain realized in an amount of the applicable percentage of additional depreciation. For further information, please see Internal Revenue Code Section 1250(a)(1).  Thus, the disposition of real property that has been depreciated can trigger Section 1250 gain, but what effect does Section 1250 gain, or is there Section 1250 gain through a like kind exchange controlled by Internal Revenue Code Section 1031?  If a taxpayer transfers and receives solely like kind Section 1250 property, there is no Section 1250 gain through the transaction.  See Internal Revenue Code Section 1250(d)(4).  Thus, the key for deferring such gain is an exchange of like kind 1250 property.

If the taxpayer does recognize gain on a 1031 like kind exchange, such gain would likely be characterized as Section 1250 gain and thus be treated as ordinary income.  The gain would be the greater of the gain determined without applying Section 1250, recognized on the exchange or the excess of the amount of Section 1250 gain that but for a like kind exchange under 1031, would have been recognized over the fair market value of the Section 1250 property.  See IRC Section 1250(d)(4)(A) and 1250(d)(4)(C).

In terms of a 1031 like kind exchange, what types of property don’t qualify for non-recognition under code?  The exchange of the items below do not qualify for non-recognition treatment:

–          Stocks, bonds or notes;

–          Stock in trade or other property help primarily for sale;

–          Other securities or evidences of indebtedness or interest;

–          Partnership interests;

–          Certificates of trust or beneficial interests;

–          Goodwill and going concern value.

You can also reference Internal Revenue Code Section 1031(a)(2) regarding property that would not qualify for non-recognition in a 1031 like kind exchange.

As always, if you are considering a transaction and are unsure of the tax consequences, please consult a tax attorney or tax professional and realize this article is for informational purposes alone.  You can speak with a Denver tax attorney by contacting The McGuire Law Firm.

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