REG property-transaction coverage for Section 1031 exchanges, Section 1033 conversions, deferred gain, and replacement basis.
This chapter covers property transactions where gain may be deferred instead of recognized immediately. These rules are highly testable because the outcome depends on satisfying specific structural requirements and then carrying the deferred consequence into replacement-property basis.
Nonrecognition does not mean no gain exists. The exam often asks whether realized gain is recognized now, deferred into basis, partially recognized because of boot, or lost because a requirement was not satisfied.
| Transaction issue | What to decide first | Common REG trap |
|---|---|---|
| Like-kind exchange | Whether the property, taxpayer, timing, and structure qualify. | Treating any swap of assets as tax-deferred. |
| Involuntary conversion | Whether replacement timing and property rules allow deferral. | Recognizing or deferring gain without checking replacement requirements. |
| Boot or other property | Whether part of the realized gain must be recognized. | Assuming nonrecognition is all-or-nothing. |
| Replacement basis | How deferred gain reduces or affects the basis of the new property. | Calculating current gain correctly but losing the basis consequence. |
| Step | What to determine | Why it matters |
|---|---|---|
| Compute realized gain or loss | Amount realized, adjusted basis, liabilities, and transaction costs. | Nonrecognition starts with realized gain, even when recognition is deferred. |
| Test the deferral rule | Confirm the exchange or conversion satisfies the statute and timing requirements. | A failed requirement usually turns deferral into current recognition. |
| Identify boot or nonqualifying property | Separate qualifying property from cash, debt relief, or other property. | Boot can trigger partial recognition. |
| Assign replacement basis | Carry deferred gain into the new property’s basis. | Basis preserves the future tax consequence. |
| Track planning documentation | Preserve dates, property identity, intermediaries, and replacement evidence. | Deferral depends on support, not only on taxpayer intent. |
| Checkpoint | Like-kind exchange focus | Involuntary conversion focus |
|---|---|---|
| Qualifying event | Exchange of eligible real property held for investment or business use. | Destruction, theft, seizure, requisition, condemnation, or threat of condemnation. |
| Timing | Exchange structure and identification or receipt timing when deferred exchange rules apply. | Replacement period and election requirements. |
| Property match | Like-kind real property rules and excluded property. | Similar or related in service or use, or qualifying replacement rules. |
| Cash or boot | Recognized gain may arise from cash, debt relief, or nonqualifying property. | Excess proceeds not reinvested can trigger recognition. |
| Basis result | Replacement basis reflects deferred gain and boot effects. | Replacement basis preserves deferred gain from the conversion. |