712 / How is the tax treatment of a like-kind exchange altered if one or more parties assumes a liability of the other party or receives property subject to a liability in the exchange?

Editor's Note: For tax years beginning after 2017, the nonrecognition treatment provided under IRC Section 1031 is limited to exchanges of real property that is not held primarily for sale.¹ This provision applies to exchanges occurring after December 31, 2017. An exception existed if either: (1) the property involved in the exchange was disposed of on or before December 31, 2017, or (2) the property received in the exchange was received on or before December 31, 2017.² The new rules also provide that real property located within the U.S. and foreign real property are not of a like-kind.³

If, in an exchange, one party assumes a liability of the other party or receives property subject to a liability, he will be deemed to have transferred "boot" in an amount equal to the liability. The party who transfers the property subject to the liability or whose liability is assumed will be deemed to have received the "boot." If each party to an exchange either assumes a liability of the other party or acquires property subject to a liability, the amounts of such liabilities will be offset and only the difference will be treated as "boot" given and received by the applicable parties.⁴ Generally, liabilities that qualify to offset or reduce any taxable boot received are those to which the property received was subject to prior to the exchange and that then are assumed as part of the exchange.⁵

The Service ruled that if a partnership enters into an exchange that qualifies as a deferred like-kind exchange, in which property subject to a liability is transferred in one taxable year of the partnership, and property subject to a liability is received in the following taxable year of the partnership, the liabilities must be netted for purpose of IRC Section 752. Any net decrease in a partner's share of partnership liability must be taken into account for purposes of IRC Section 752(b) in the first taxable year of the partnership, and any net increase in a partner's share of partnership liability must be taken into account for purposes of IRC Section 752(a) in the second year of the partnership.⁶