SECTION 1.1031(j)-1. EXCHANGES OF MULTIPLE PROPERTIES.
(a) INTRODUCTION--
(1) OVERVIEW. As a general rule, the application of section 1031
requires a property-by-property comparison for computing the gain
recognized and basis of property received in a like-kind exchange.
This section provides an exception to this general rule in the case
of an exchange of multiple properties. An exchange is an exchange of
multiple properties if, under paragraph (b)(2) of this section, more
than one exchange group is created. In addition, an exchange is an
exchange of multiple properties if only one exchange group is created
but there is more than one property being transferred or received
within that exchange group. Paragraph (b) of this section provides
rules for computing the amount of gain recognized in an exchange of
multiple properties qualifying for nonrecognition of gain or loss
under section 1031. Paragraph (c) of this section provides rules for
computing the basis of properties received in an exchange of multiple
properties qualifying for nonrecognition of gain or loss under
section 1031.
(2) GENERAL APPROACH.
(i) In general, the amount of gain recognized in an exchange of
multiple properties is computed by first separating the
properties transferred and the properties received by the
taxpayer in the exchange into exchange groups in the manner
described in paragraph (b)(2) of this section. The separation of
the properties transferred and the properties received in the
exchange into exchange groups involves matching up properties of
a like kind of like class to the extent possible. Next, all
liabilities assumed by the taxpayer as part of the transaction
are offset by all liabilities of which the taxpayer is relieved
as part of the transaction, with the excess liabilities assumed
or relieved allocated in accordance with paragraph (b)(2)(ii) of
this section. Then, the rules of section 1031 and the
regulations thereunder are applied separately to each exchange
group to determine the amount of gain recognized in the
exchange. See Sections 1.1031(b)-1 and 1.1031(c)-1. Finally, the
rules of section 1031 and the regulations thereunder are applied
separately to each exchange group to determine the basis of the
properties received in the exchange. See Sections 1.1031(d)-1
and 1.1031(d)-2.
(ii) For purposes of this section, the exchanges are assumed to
be made at arms' length, so that the aggregate fair market value
of the property received in the exchange equals the aggregate
fair market value of the property transferred. Thus, the amount
realized with respect to the properties transferred in each
exchange group is assumed to equal their aggregate fair market
value.
(b) COMPUTATION OF GAIN RECOGNIZED--
(1) IN GENERAL. In computing the amount of gain recognized in an
exchange of multiple properties, the fair market value must be
determined for each property transferred and for each property
received by the taxpayer in the exchange. In addition, the adjusted
basis must be determined for each property transferred by the
taxpayer in the exchange.
(2) EXCHANGE GROUPS AND RESIDUAL GROUP. The properties transferred
and the properties received by the taxpayer in the exchange are
separated into exchange groups and a residual group to the extent
provided in this paragraph (b)(2).
(i) EXCHANGE GROUPS. Each exchange group consists of the
properties transferred and received in the exchange, all of
which are of a like kind or like class. If a property could be
included in more than one exchange group, the taxpayer may
include the property in any of those exchange groups. Property
eligible for inclusion within an exchange group does not include
money or property described in section 1031(a)(2) (i.e., stock
in trade or other property held primarily for sale, stocks,
bonds, notes, other securities or evidences of indebtedness or
interest, interests in a partnership, certificates of trust or
beneficial interests, or choses in action). For example, an
exchange group may consist of all exchanged properties that are
within the same General Asset Class or within the same Product
Class (as defined in Section 1.1031(a)-2(b)). Each exchange
group must consist of at least one property transferred and at
least one property received in the exchange.
(ii) TREATMENT OF LIABILITIES.
(A) All liabilities assumed by the taxpayer as part of the
exchange are offset against all liabilities of which the
taxpayer is relieved as part of the exchange, regardless of
whether the liabilities are recourse or nonrecourse and
regardless of whether the liabilities are secured by or
otherwise relate to specific property transferred or
received as part of the exchange. See Sections 1.1031
(b)-1(c) and 1.1031(d)-2. For purposes of this section,
liabilities assumed by the taxpayer as part of the exchange
consist of liabilities of the other party to the exchange
assumed by the taxpayer and liabilities subject to which
the other party's property is transferred in the exchange.
Similarly, liabilities of which the taxpayer is relieved as
part of the exchange consist of liabilities of the taxpayer
assumed by the other party to the exchange and liabilities
subject to which the taxpayer's property is transferred.
(B) If there are excess liabilities assumed by the taxpayer
as part of the exchange (i.e., the amount of liabilities
assumed by the taxpayer exceeds the amount of liabilities
of which the taxpayer is relieved), the excess is allocated
among the exchange groups (but not to the residual group)
in proportion to the aggregate fair market value of the
properties received by the taxpayer in the exchange groups.
The amount of excess liabilities assumed by the taxpayer
that are allocated to each exchange group may not exceed
the aggregate fair market value of the properties received
in the exchange group.
(C) If there are excess liabilities of which the taxpayer
is relieved as part of the exchange (i.e., the amount of
liabilities of which the taxpayer is relieved exceeds the
amount of liabilities assumed by the taxpayer), the excess
is treated as a Class I asset for purposes of making
allocations to the residual group under paragraph
(b)(2)(iii) of this section.
(D) Paragraphs (b)(2)(ii)(A), (B), and (C) of this section
are applied in the same manner even if section 1031 and
this section apply to only a portion of a larger
transaction (such as a transaction described in section
1060(c) and Section 1.1060-1T(b)). In that event, the
amount of excess liabilities assumed by the taxpayer or the
amount of excess liabilities of which the taxpayer is
relieved is determined based on all liabilities assumed by
the taxpayer and all liabilities of which the taxpayer is
relieve as part of the larger transaction.
(iii) RESIDUAL GROUP. If the aggregate fair market value of the
properties transferred in all of the exchange groups differs
from the aggregate fair market value of the properties received
in all of the exchange groups (taking liabilities into account
in the manner described in paragraph (b)(2)(ii) of this
section), a residual group is created. The residual group
consists of an amount of money or other property having an
aggregate fair market value equal to that difference. The
residual group consists of either money or other property
transferred in the exchange or money or other property received
in the exchange, but not both. For this purpose, other property
includes property described in section 1031(a)(2) (i.e., stock
in trade or other property held primarily for sale, stocks,
bonds, notes, other securities or evidences of indebtedness or
interest, interests in a partnership, certificates of trust or
beneficial interests, or choses in action), property transferred
that is not of a like kind or like class with any property
received, and property received that is not of a like kind or
like class with any property transferred. The money and
properties that are allocated to the residual group are
considered to come from the following assets in the following
order: first from Class I assets, then from Class II assets,
then from Class III assets, and then from Class IV assets. The
terms Class I assets, Class II assets, Class III assets, and
Class IV assets have the same meanings as in Section
1.1060-1T(d). Within each Class, taxpayers may choose which
properties are allocated to the residual group.
(iv) EXCHANGE GROUP SURPLUS AND DEFICIENCY. For each of the
exchange groups described in this section, an "exchange group
surplus" or "exchange group deficiency," if any, must be
determined. An exchange group surplus is the excess of the
aggregate fair market value of the properties received (less the
amount of any excess liabilities assumed by the taxpayer that
are allocated to that exchange group), in an exchange group over
the aggregate fair market value of the properties transferred in
that exchange group. An exchange group deficiency is the excess
of the aggregate fair market value of the properties transferred
in an exchange group over the aggregate fair market value of the
properties received (less the amount of any excess liabilities
assumed by the taxpayer that are allocated to that exchange
group) in that exchange group.
(3) AMOUNT OF GAIN RECOGNIZED.--
(i) For purposes of this section, the amount of gain or loss
realized with respect to each exchange group and the residual
group is the difference between the aggregate fair market value
of the properties transferred in that exchange group or residual
group and the properties' aggregate adjusted basis. The gain
realized with respect to each exchange group is recognized to
the extent of the lesser of the gain realized and the amount of
the exchange group deficiency, if any. Losses realized with
respect to an exchange group are not recognized. See section
1031(a) and (c). The total amount of gain recognized under
section 1031 in the exchange is the sum of the amount of gain
recognized with respect to each exchange group. With respect to
the residual group, the gain or loss realized (as determined
under this section) is recognized as provided in section 1001 or
other applicable provision of the Code.
(ii) The amount of gain or loss realized and recognized with
respect to properties transferred by the taxpayer that are not
within any exchange group or the residual group is determined
under section 1001 and other applicable provisions of the Code,
with proper adjustments made for all liabilities not allocated
to the exchange groups or the residual group.
(c) COMPUTATION OF BASIS OF PROPERTIES RECEIVED. In an exchange of
multiple properties qualifying for nonrecognition of gain or loss under
section 1031 and this section, the aggregate basis of properties received
in each of the exchange groups is the aggregate adjusted basis of the
properties transferred by the taxpayer within that exchange group,
increased by the amount of gain recognized by the taxpayer with respect to
that exchange group, increased by the amount of the exchange group surplus
or decreased by the amount of the exchange group deficiency, and increased
by the amount, if any, of excess liabilities assumed by the taxpayer that
are allocated to that exchange group. The resulting aggregate basis of
each exchange group is allocated proportionately to each property received
in the exchange group in accordance with its fair market value. The basis
of each property received within the residual group (other than money) is
equal to its fair market value.
(d) EXAMPLES. The application of this section may be illustrated by the
following examples:
EXAMPLE 1.
(i) K exchanges computer A (asset class 00.12) and automobile A
(asset class 00.22), both of which were held by K for productive
use in its business, with W for printer B (asset class 00.12)
and automobile B (asset class 00.22), both of which will be held
by K for productive use in its business. K's adjusted basis and
the fair market value of the exchanged properties are as
follows:
FAIR
ADJUSTED MARKET
BASIS VALUE
-------- ------
Computer A $375 $1,000
Automobile A 1,500 4,000
Printer B 2,050
Automobile B 2,950
(ii) Under paragraph (b)(2) of this section, the properties
exchanged are separated into exchange groups as follows:
(A) The first exchange group consists of computer A and
printer B (both are within the same General Asset Class)
and, as to K, has an exchange group surplus of $1050
because the fair market value of printer B ($2050) exceeds
the fair market value of computer A ($1000) by that amount.
(B) The second exchange group consists of automobile A and
automobile B (both are within the same General Asset Class)
and, as to K, has an exchange group deficiency of $1050
because the fair market value of automobile A ($4000)
exceeds the fair market value of automobile B ($2950) by
that amount.
(iii) K recognizes gain on the exchange as follows:
(A) With respect to the first exchange group, the amount of
gain realized is the excess of the fair market value of
computer A ($1000) over its adjusted basis ($375), or $625.
The amount of gain recognized is the lesser of the gain
realized ($625) and the exchange group deficiency ($0), or
$0.
(B) With respect to the second exchange group, the amount
of gain realized is the excess of the fair market value of
automobile A ($4000) over its adjusted basis ($1500), or
$2500. The amount of gain recognized is the lesser of the
gain realized ($2500) and the exchange group deficiency
($1050), or $1050.
(iv) The total amount of gain recognized by K in the exchange is
the sum of the gains recognized with respect to both exchange
groups ($0 + $1050), or $1050.
(v) The bases of the property received by K in the exchange,
printer B and automobile B, are determined in the following
manner:
(A) The basis of the property received in the first
exchange group is the adjusted basis of the property
transferred within the exchange group ($375), increased by
the amount of gain recognized with respect to that exchange
group ($0), increased by the amount of the exchange group
surplus ($1050), and increased by the amount of excess
liabilities assumed allocated to that exchange group ($0),
or $1425. Because printer B was the only property received
within the first exchange group, the entire basis of $1425
is allocated to printer B.
(B) The basis of the property received in the second
exchange group is the adjusted basis of the property
transferred within that exchange group ($1500), increased
by the amount of gain recognized with respect to that
exchange group ($1050), decreased by the amount of the
exchange group deficiency ($1050), and increased by the
amount of excess liabilities assumed allocated to that
exchange group ($0), or $1500. Because automobile B was the
only property received within the second exchange group,
the entire basis of $1500 is allocated to automobile B.
EXAMPLE 2.
(i) F exchanges computer A (asset class 00.12) and automobile A
(asset class 00.22), both of which were held by F for productive
use in its business, with G for printer B (asset class 00.12)
and automobile B (asset class 00.22), both of which will be held
by F for productive use in its business, and corporate stock and
$500 cash. The adjusted basis and fair market value of the
properties are as follows:
FAIR
ADJUSTED MARKET
BASIS VALUE
-------- ------
Computer A $375 $1,000
Automobile A 3,500 4,000
Printer B 800
Automobile B 2,950
Corporate stock 750
Cash 500
(ii) Under paragraph (b)(2) of this section, the properties
exchanged are separated into exchange groups as follows:
(A) The first exchange group consists of computer A and
printer B (both are within the same General Asset Class)
and, as to F, has an exchange group deficiency of $200
because the fair market value of computer A ($1000) exceeds
the fair market value of printer B ($800) by that amount.
(B) The second exchange group consists of automobile A and
automobile B (both are within the same General Asset Class)
and, as to F, has an exchange group deficiency of $1050
because the fair market value of automobile A ($4000)
exceeds the fair market value of automobile B ($2950) by
that amount.
(C) Because the aggregate fair market value of the
properties transferred by F in the exchange groups ($5,000)
exceeds the aggregate fair market value of the properties
received by F in the exchange groups ($3750) by $1250,
there is a residual group in that amount consisting of the
$500 cash and the $750 worth of corporate stock.
(iii) F recognizes gain on the exchange as follows:
(A) With respect to the first exchange group, the amount of
gain realized is the excess of the fair market value of
computer A ($1000) over its adjusted basis ($375), or $625.
The amount of gain recognized is the lesser of the gain
realized ($625) and the exchange group deficiency ($200),
or $200.
(B) With respect to the second exchange group, the amount
of gain realized is the excess of the fair market value of
automobile A ($4000) over its adjusted basis ($3500), or
$500. The amount of gain recognized is the lesser of the
gain realized ($500) and the exchange group deficiency
($1050), or $500.
(C) No property transferred by F was allocated to the
residual group. Therefore, F does not recognize gain or
loss with respect to the residual group.
(iv) The total amount of gain recognized by F in the exchange is
the sum of the gains recognized with respect to both exchange
groups ($200 + $500), or $700.
(v) The bases of the properties received by F in the exchange
(printer B, automobile B, and the corporate stock) are
determined in the following manner:
(A) The basis of the property received in the first
exchange group is the adjusted basis of the property
transferred within that exchange group ($375), increased by
the amount of gain recognized with respect to that exchange
group ($200), decreased by the amount of the exchange group
deficiency ($200), and increased by the amount of excess
liabilities assumed allocated to that exchange group ($0),
or $375. Because printer B was the only property received
within the first exchange group, the entire basis of $375
is allocated to printer B.
(B) The basis of the property received in the second
exchange group is the adjusted basis of the property
transferred within that exchange group ($3500), increased
by the amount of gain recognized with respect to that
exchange group ($500), decreased by the amount of the
exchange group deficiency ($1050), and increased by the
amount of excess liabilites assumed allocated to that
exchange group ($0), or $2950. Because automobile B was the
only property received within the second exchange group,
the entire basis of $2950 is allocated to automobile B.
(C) The basis of the property received within the residual
group (the corporate stock) is equal to its fair market
value or $750. Cash of $500 is also received within the
residual group.
EXAMPLE 3.
(i) J a 500
(ii) Under paragraph (b)(2) of this section, the properties
exchanged are separated into exchange groups as follows:
(A) The first exchange group consists of computer A and
printer B (both are within the same General Asset Class)
and, as to F, has an exchange group deficiency of $200
because the fair market value of computer A ($1000) exceeds
the fair market value of printer B ($800) by that amount.
(B) The second exchange group consists of automobile A and
automobile B (both are within the same General Asset Class)
and, as to F, has an exchange group deficiency of $1050
because the fair market value of automobile A ($4000)
exceeds the fair market value of automobile B ($2950) by
that amount.
(C) Because the aggregate fair market value of the
properties transferred by F in the exchange groups ($5,000)
exceeds the aggregate fair market value of the properties
received by F in the exchange groups ($3750) by $1250,
there is a residual group in that amount consisting of the
$500 cash and the $750 worth of corporate stock.
(iii) F recogniznd H enter into an exchange of the following
properties. All of the property (except for the inventory)
transferred by J was held for productive use in J's business.
All of the property received by J will be held by J for
productive use in its business.
__________________________________________________________________________
J TRANSFERS: H TRANSFERS:
-------------------------------------- -----------------------
FAIR FAIR
ADJUSTED MARKET MARKET
PROPERTY BASIS VALUE PROPERTY VALUE
-------- -------- ------ -------- -------
Computer A $1,500 $5,000 Computer Z $4,500
Computer B 500 3,000 Printer Y 2,500
Printer C 2,000 1,500 Real Estate X hin the same
Product Class (SIC Code 3531)) and, as to J, has an exchange group
deficiency of $500 ($2500 - $2000).
(D) Because the aggregate fair market value of the
properties transferred by J in the exchange groups
|
