IRS Publication 544 — Sales and Other Dispositions of Assets
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“• For a sale, exchange, or involuntary conversion of business property, complete Form 4797 (discussed later).”
Relinquished Property Property A … $30,000 Replacement Properties Property B … $20,000 Property C … 5,000 Net liabilities assumed … (2,500) Total … $22,500 Because the FMV of the relinquished property, $30,000, is greater than the FMV of the replacement properties (less net liabilities assumed), $22,500, the exchange group has a $7,500 exchange group deficiency. The gain realized is computed as follows.
FMV relinquished Property A … $30,000 Basis … (10,000) Gain realized … $20,000 Gain of $7,500 is recognized on the exchange, the lesser of the exchange group deficiency of $7,500 and gain realized of $20,000.
A residual group is created in the amount of $7,500, consisting of the $5,000 in cash received in the exchange and Property D ($2,500). Because no non -like-kind property in the residual group is relinquished, there is no gain or loss on the residual group.
The basis of the replacement properties acquired in a multiple-property exchange is the aggregate adjusted basis of the relinquished properties, increased by any gain recognized, increased by the exchange group surplus or decreased by the exchange group deficiency, and increased by any excess liabilities you assumed on the replacement property. The aggregate basis is allocated proportionately to each real property received in accordance with its FMV . For more information on basis see Pub. 551. Like-Kind Exchanges Between Related Persons Special rules apply to like -kind exchanges between related persons. These rules affect both direct and indirect exchanges. Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. The gain or loss on the original exchange must be recognized as of the date of the later disposition.
Related persons. Under these rules, related persons include, for example, you and a member of your family (spouse, siblings, parent, child, etc.), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits.
Caution: An exchange structured to avoid the related party rules is not a like-kind exchange.
Publication 544 (2025) Chapter 1 Gain or Loss 25
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