The Tax Treatment of Like Kind Exchanges 

Selling or exchanging business or investment property usually leads to a taxable capital gain or 

loss. For example, if a share of stock or a building or other asset used in a business is sold for 

more than its cost basis, the sale generates a taxable capital gain. However, the tax otherwise 

due can be deferred when certain business or investment property is exchanged for property of a 

“like-kind” in ways that comply with the tax rules.

1

 The traditional prototype case involved 

direct exchanges, e.g., the owner of an apartment building exchanged it for another apartment 

building that was more suitable. Over time, the definition of eligible exchanges has been

expanded. In recent years, most like kind exchanges of real estate have involved complex threeparty transactions facilitated by qualified intermediaries. In addition, the most common like-kind 

exchanges are now those involving the trade-in of vehicles for replacement vehicles and vehicle 

fleets, e.g., by rental car companies, farmers, and businesses. 

The deferral of capital gains tax allowed by the like-kind exchange rules is not currently 

considered a tax expenditure in the Federal Budget. While measures of economic income 

generally include capital gains each year as they accrue, the Federal Budget accepts the current 

system of not taxing capital gains until they are “realized” as part of the baseline tax system 

against which tax expenditures are measured. In contrast, like-kind exchanges are considered to

be a tax expenditure by the Joint Committee on Taxation (JCT). Like the Federal Budget, the 

JCT accepts the realization-based system for capital gains in its baseline tax and therefore does 

not consider deferral of tax on capital gains to be a tax expenditure. However, the JCT considers 

like-kind exchanges to be a tax expenditure because such exchanges allow deferral of tax beyond 

the year of exchange. For Fiscal Year 2014, the JCT estimated a tax expenditure of $5.7 billion 

for corporations and $3.0 billion for individuals (including pass-through businesses) for the likekind exchange provision. Both the JCT and the Federal Budget consider the preferential rates for 

long-term capital gains to be a tax expenditure. 

How the Provision Works 

Under this provision, no gain or loss is recognized if a taxpayer exchanges eligible property for 

property of a like kind. The taxpayer is required to recognize capital gain or loss, however, to 

the extent that the taxpayer receives money or non-like kind property in the exchange. Both the 

relinquished and the like-kind property must be held for productive use in the taxpayer’s trade or 

business or for investment. The provision does not apply to property held for sale (inventory 

property) or to financial assets such as stock, bonds and partnership interests. After the 

exchange, the taxpayer retains the original basis (increased by any non-like property received or 

cash paid by the taxpayer as part of the transaction). Thus, the taxpayer has a reduced amount of 

future depreciation that offsets part of the deferred gain. Additional requirements include rules 

that limit the time period to complete the exchange.2

1 Like kind exchanges are governed under Section 1031. Other provisions that allow deferral of recognition of 

capital gain or loss include carryover basis for gifts, losses in wash sales, contributions of property to a partnership, 

involuntary conversions such as fire, theft and condemnation, and certain business reorganization transactions. 2 The replacement property must be identified within 45 days after the first property is relinquished and acquired by 

the earlier of (1) 180 days after the transfer of the relinquished property or (2) the due date (including extensions) for 

the taxpayer’s tax return for the year in which the property is relinquished. In certain more complex transactions, 

taxpayers can have up to 360 days to complete a transaction.

Office of Tax Analysis 

U.S. Department of the Treasury 

2014

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Since direct exchanges of real estate are difficult to arrange, most exchanges of real estate are 

three-party (aka deferred) like-kind exchanges. In a typical three-party exchange, taxpayer A 

would like to exchange a rental property for the rental property of taxpayer B. Taxpayer B, 

however, does not want taxpayer A’s rental property, but would like some third property owned 

by taxpayer C. Working through a qualified intermediary, taxpayer A’s property is sold for cash 

used to buy the property of taxpayer C. The property acquired from taxpayer C is then 

exchanged for B’s property. Under general tax rules, these transactions would be taxable events. 

In a like-kind exchange, the qualified intermediary holds the cash (and any non-qualified 

property) received from selling the rental property of taxpayer A in a trust account and uses it to 

acquire the property of taxpayer C. Taxpayers A and B would not be taxable on their exchange 

of qualified property, but capital gain would be taxable up to the amount of any cash or ineligible 

property received in the exchange. The basis of taxpayers A and B in their new property would 

be their original basis plus the amounts of any cash paid for the replacement property and taxable 

capital gain from the receipt of cash or ineligible property. 

History and Rationales for the Provision 

The original provision was enacted in 1921 along with other major changes to capital gains rules 

and has therefore been in existence almost since the beginning of the income tax.3

 One of the 

arguments for not treating the exchange of like-kind property as a realization event is that the 

taxpayers were continuing their on-going investment in the same business activity rather than 

cashing in their investment. In addition, Congress recognized that the dramatic increase in tax 

rates on capital gains during World War I had created substantial lock-in effects that greatly 

interfered with normal business transactions.4 Exchanges of property would be discouraged 

because there wouldn’t be enough money left after paying the capital gains tax to purchase a 

replacement property of comparable value. Persuaded by these arguments, Congress has allowed 

capital gains taxes to be deferred in such exchanges since 1921 with only modest changes in the 

rules. 

Types and Amounts of Like Kind Exchanges 

The types and amounts of capital gains deferred in like-kind exchanges in 2007 are reported in 

the table below.5 C corporations (subject to the corporate income tax) deferred $25.8 billion in 

capital gains in 2007. Over half of this amount reflected transactions related to vehicles, 

3 While capital gains were initially taxed at the same rates as other income, the Revenue Act of 1921 created a new 

12 1/2 percent alternative maximum tax rate on capital gains for assets held longer than two years. In addition to the 

new rate, the 1921 Act limited the deduction of capital losses and required recognition of capital asset sales and 

exchanges except in the case of like-kind exchanges, certain business reorganizations, and involuntary conversions 

due to fire and theft.

4 The increase in the top income tax rate from 7 percent to 77 percent to help finance World War I efforts created 

strong lock-in effects: taxpayers realized few capital gains but had strong incentives to realize capital losses. To 

limit the revenue losses, Treasury issued regulations in 1919 that sales of capital assets would not be recognized for 

tax purposes unless cash was received. The 1921 Act reversed this approach by requiring recognition of all 

exchanges except in specified situations. 5 Tax year 2007 is the most recent year not significantly affected by the financial and real estate crises and also the 

most recent year for which consistent data are available for all types of taxpayers.

Office of Tax Analysis 

U.S. Department of the Treasury 

2014

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including replacement of vehicle fleets by rental car firms and other types of firms with large 

truck or auto vehicle fleets. In addition, banks are thought to be significant users of this 

provision in the context of vehicle leasing programs. Partnerships reported about $35.6 billion of 

deferred capital gain. In contrast to C corporations, real estate transactions accounted for nearly 

90 percent of the deferred gains of partnerships in 2007.6 

For tax year 2007, individual taxpayers deferred $21.2 billion of capital gain using the like-kind 

provision. Nearly half of this amount was deferred capital gain on residential rental properties 

and most of the rest was business real estate and land. In total, real estate accounted for over 

90 percent of the amount of gains deferred by individuals. The largest number of transactions, 

however, involved business personal property, primarily involving trade-ins of trucks and other 

leased vehicles used for business or farm purposes for replacement vehicles. 

As shown in the data appendix, gains deferred by partnerships dropped dramatically from $35.6 

billion in 2007 to only $6.1 billion in 2010 due to the effects of the recession on real estate. In 

contrast, gains deferred by corporations increased from $25.8 billion to $29.3 billion because the 

decline in real estate was more than offset by a dramatic increase in like-kind exchanges of 

vehicles.

Deferred Capital Gains in Like-Kind Exchanges in 2007

Amounts (millions of dollars) Percent of Total Deferred Gains

Industry C 

Corporations

Partnerships Individual 

Returns

C 

Corporations

Partnerships Individual 

Returns

Agriculture 91 577 649 0.4 1.6 3.1

Mining 176 0 0 0.7 0.0 0.0

Oil & Gas 1,598 306 49 6.2 0.9 0.2

Construction 195 15 0 0.8 0.0 0.0

Manufacturing 1,128 7 0 4.4 0.0 0.0

Vehicles 13,374 842 0 51.8 2.4 0.0

Transport 741 14 50 2.9 0.0 0.2

Communication 481 1,229 0 1.9 3.5 0.0

Wholesale-Retail 638 293 0 2.5 0.8 0.0

Finance 3,781 512 0 14.7 1.4 0.0

Real Estate 3,197 31,394 19,724 12.4 88.2 92.8

Services & Misc. 402 722 921 1.6 1.1 4.3

All 25,801 35,580 21,265 100.0 100.0 100.0

Note: Types of deferred gains for C corporations and partnerships are based on the industry of the firm. Data on asset 

types is not available because most businesses state "Available upon request" on their capital gains forms. Individual 

deferred gains are based on transactions in the IRS SOI 2007 Sales of Capital Assets study.

6 While the tables are based on the industry of the partnership, analysis of like-kind exchange transactions reported 

on e-filed partnership returns for 2009 showed that 76 percent of the deferred gains were real estate. The largest 

percentages of transactions, however, were for farm equipment (33%), cars and trucks (30%) and real estate (18%).

Office of Tax Analysis 

U.S. Department of the Treasury 

2014

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Data Appendix

Industry / Primary 

Business Activity

Number of 

Firms

FMV Likekind 

received

Total 

FMV 

received

Basis on 

property 

given up

Realized 

gains

Ordinary 

income 

recognized

Capital 

gains 

recognized

Deferred 

gains

All net 

capital 

gains

% of 

Deferred 

Gains

Agriculture 2,529 303 337 212 126 0 34 91 92 0.4

Mining 128 222 223 46 178 1 1 176 290 0.7

Oil & Gas 264 2,897 3,135 1,239 2,182 409 164 1,598 7,741 6.2

Construction 4,265 593 623 425 228 1 31 195 860 0.8

Manufacturing 2,106 2,182 2,325 1,051 1,274 21 125 1,128 6,394 4.4

Vehicles 1,110 20,752 20,810 8,605 13,489 47 10 13,374 331 51.8

Transportation 24 236 259 36 944 174 34 741 177 2.9

Communication 214 709 751 231 543 4 38 481 3,499 1.9

Wholesale-Retail 2,867 1,337 1,404 705 718 16 64 638 5,916 2.5

Banks & Finance 190 4,484 5,650 2,017 3,782 106 17 3,659 14,029 14.2

Insurance 462 304 305 182 123 0 2 122 3,649 0.5

Real Estate 1,185 4,957 5,116 1,832 3,350 16 137 3,197 1,153 12.4

Services & Misc. 2,334 755 815 412 467 21 43 402 902 1.6

All 17,678 39,729 41,754 16,994 27,404 815 701 25,801 45,033 100.0

Agriculture 2,280 362 366 266 100 0 4 96 84 0.3

Mining 168 136 138 47 93 0 1 91 128 0.3

Oil & Gas 101 3,728 4,224 1,209 3,023 98 395 2,530 7,348 8.6

Construction 1,997 212 216 144 72 3 0 69 67 0.2

Manufacturing 1,223 579 604 356 278 8 18 252 565 0.9

Vehicles 853 28,690 28,697 9,196 24,405 972 3 23,411 164 79.9

Transportation 28 206 208 83 179 2 4 172 39 0.6

Communication 102 40 62 22 86 24 0 62 209 0.2

Wholesale-Retail 2,006 769 813 415 436 15 37 384 1,464 1.3

Banks & Finance 144 2,166 3,231 1,366 1,939 50 0 1,889 1,108 6.4

Insurance 572 32 79 48 67 0 0 67 1,815 0.2

Real Estate 695 423 438 277 235 0 15 218 47 0.7

Services & Misc. 2,527 221 244 187 57 1 2 54 422 0.2

All 12,697 37,565 39,319 13,616 30,970 1,174 479 29,295 13,461 100.0

Industry / Primary 

Business Activity

Number of 

Firms

FMV Likekind 

received

Total 

FMV 

received

Basis on 

property 

given up

Realized 

gains

Ordinary 

income 

recognized

Capital 

gains 

recognized

Deferred 

gains

All net 

capital 

gains

% of 

Deferred 

Gains

Agriculture 4,733 936 940 359 581 0 4 577 39 1.6

Mining 133 15 15 15 0 0 0 0 0 0.0

Oil & Gas 55 943 951 615 314 8 0 306 43 0.9

Construction 1,513 93 359 246 113 0 98 15 11 0.0

Manufacturing 224 33 33 27 7 0 0 7 5 0.0

Vehicles 1,259 985 988 397 846 2 2 842 46 2.4

Transportation 136 136 136 122 14 0 0 14 0 0.0

Communication 134 1,319 1,334 307 1,242 3 11 1,229 3 3.5

Wholesale-Retail 502 618 700 332 368 6 69 293 33 0.8

Banks & Finance 412 978 984 647 518 0 6 512 507 1.4

Real Estate 7,626 65,298 69,147 34,013 35,192 35 3,762 31,394 1,696 88.2

Services & Misc. 906 840 844 561 396 2 3 391 722 1.1

All 17,634 72,195 76,431 37,641 39,592 56 3,956 35,580 3,104 100.0

Agriculture 5,062 1,389 1,420 825 595 1 27 567 93 9.3

Mining 28 35 35 15 20 0 0 20 165 0.3

Oil & Gas 150 349 796 199 649 10 399 240 424 3.9

Construction 659 37 37 49 -12 0 0 -12 0 -0.2

Manufacturing 402 48 53 38 16 0 2 13 1 0.2

Vehicles 626 5,589 6,129 3,303 2,848 53 494 2,301 -1 37.6

Transportation 525 306 306 228 78 0 0 78 -1 1.3

Communication 24 354 429 174 255 34 40 181 0 2.9

Wholesale-Retail 648 178 181 91 99 2 2 95 4 1.6

Banks & Finance 152 176 179 93 86 0 2 83 228 1.4

Real Estate 2,948 9,595 10,351 7,536 2,969 1 457 2,511 561 41.0

Services & Misc. 2,047 195 226 147 79 2 29 48 8 0.8

All 13,272 18,253 20,142 12,697 7,682 104 1,452 6,126 1,482 100.0

Like-Kind Exchanges and Deferred Gains of C Corporations and Partnerships (in millions), 2007 and 2010 

2007

2010

2007

Note: Categories of deferred gains are based on the industry or primary business activity of the firm. Vehicles includes firms that 

manufacture, sell, lease or rent cars, trucks and other vehicles. Data on asset types is not available because many businesses state 

"Available upon request" on their capital gains forms. Dollar amounts are in millions of dollars.

C Corporations

2010

Partnerships

Office of Tax Analysis 

U.S. Department of the Treasury 

2014

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