IRC §1031 Like-Kind Exchange — Tax-Deferred Property Swap for REIT

💡 Accountant's Note

IRC §1031 allows a property owner to sell one property and acquire a 'like-kind' replacement property within 180 days without recognizing the gain for INCOME TAX purposes. The tax is deferred — the replacement property carries the tax basis of the relinquished property (creating a low-tax basis in the new property). For REITs: the §1031 exchange is a TAX planning tool — it doesn't affect GAAP accounting. For GAAP: the gain is recognized at the time of the sale of the relinquished property regardless of the §1031 election. The replacement property is recorded at its FAIR VALUE (not the carryover tax basis). The book/tax difference creates a DEFERRED TAX LIABILITY... wait — but REITs typically DON'T pay income tax (they distribute 90%+ of income). For most REITs: the §1031 exchange has limited GAAP implications because (1) the GAAP gain is already excluded from FFO, and (2) the REIT's corporate income tax rate is effectively zero (due to the dividends paid deduction). However, if the exchange produces 'boot' (cash received above the replacement property cost), the boot is taxable — creating a nuanced analysis.