Under Section 1031
© 1999 KEITH G. SWIRSKY

The original intent of the like-kind exchange statute was to provide for the tax-free treatment of an exchange of properties between two parties. Today, however, it is accepted that the person from whom a taxpayer receives the replacement property need not be the same person to whom the taxpayer surrenders the relinquished property. One may engage in a tax-free like-kind exchange that involves three or even four parties. A three-party exchange involves:

1. a taxpayer (A) who owns property that he wishes to dispose of,

2. a prospective purchaser (B) of the taxpayer's property, and

3. a prospective seller (C) of the replacement property which the taxpayer wishes to acquire.

In many circumstances, neither the prospective purchaser (B) nor the prospective seller (C) may be willing to engage in an exchange. In such case, the transaction will also involve:

4. a fourth-party (D) who will, for a fee, serve as an intermediary. In a four-party exchange, (D) will (i) acquire the relinquished property from (A), (ii) sell that property to (B), (iii) acquire the replacement property from (C), and (iv) transfer it to (A).

The Regulations prescribe specific procedures for three- and four-party exchanges to ensure that such transactions qualify for tax-free treatment. These procedures are discussed next.