Academic journal article Journal of Accountancy

Like-Kind Exchanges of Real Property

Academic journal article Journal of Accountancy

Like-Kind Exchanges of Real Property

Article excerpt

IRC section 1031 permits the tax-free exchange of like-kind property. If the transferor receives "boot" (such as cash) in addition to the like-kind property, the boot is currently taxable. The application of these rules to the exchange of real property that was burdened by a supply contract was recently considered by the Tax Court.

On June 25, 1993, Peabody Natural Resources Co. transferred a gold mine in exchange for a coal mine. The coal mine was burdened by two contracts mandating that it supply a fixed minimum amount of coal. The contracts could be extended for five-year periods. Peabody reported the transaction as a tax-free exchange under section 1031. The IRS concluded that because the contracts were boot the exchange was taxable.

Result. For the taxpayer. The first question before the Tax Court was the nature of the supply contracts. After reviewing New Mexico law, the court concluded they were contracts for the sale of goods and an interest in real property.

Peabody argued that, since all real property is like-kind to all other real property, the transaction was tax-free. The court rejected this argument, noting that in prior cases the courts have held that real property, especially when leases or other contracts are involved, is not always like-kind to other real estate.

Since the exchanged properties were not automatically like-kind, the Tax Court had to reconcile two prior cases. …

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