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Income tax liability: replacement property in a sale of land

You have a client who is in possession of 1,000 acres of farm ground. The farm ground was purchased 10 years ago for $160,000, and is now worth $2,000,000. The client wishes to sell the farm ground and purchase an apartment building of approximately equal value to his farm ground. How would you suggest your client obtain the replacement property without having to incur a large income tax liability?

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Under IRC Section 1031, the taxpayer can enter into a tax-deferred exchange. Sec 1031 does not cancel any tax that would be due, but simply postpones it by moving the potential liability to the replacement property.

The rules to complete a 1031 exchange are cumbersome, but have been effective since the Starker case defined them.
'1031 Starker Exchange: The landmark legal decision of T.J. Starker v. U.S., 602 F. 2d 1341 (9th Cir. 1979) was significant in the development of the 1031 tax exchange rules. In this case the Ninth Circuit Court held that non simultaneous 1031 exchanges were ...

Solution Summary

The 376-word, well-cited solution explains the general concept of the like-kind exchange followed by the case law that defined exactly how to use the concepts. The types of property that will qualify as like-kind are listed, as well as some complexities in the concept. The amount of tax savings in this transaction is calculated plus an alternative strategy which may be appropriate just before a change in administration at the federal level.