Certain exchanges of property are not taxable. This means any gain from the exchange is not recognized and you cannot deduct any loss, for example, transfer of property incident to divorce. An exchange meeting the requirements of a like-kind exchange, gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. A sale meeting the requirement of an installment sale, gain will be postponed until you receive payments.
Like-Kind and Like-Class Exchanges
Internal Revenue Code Section 1031 says that owners may defer the gain on the disposal of business property if, rather than selling for cash, they trade it for another item of business property of a similar type (i.e., fishing permit for a fishing permit). The tax liability is not eliminated; it is deferred until the sale of the newly acquired item. To qualify for a non-taxable exchange:
The property must be business or investment property.
The property must not be property held for sale (acquired specifically for resale).
There must be an exchange of property
Tangible personal property can be either “like-kind” or “like-class”.
Intangible personal property must be “like-kind”.
You must identify the property to be received within 45 days after the date you transfer the property given up in the exchange.
The exchange must be completed within 180 days.
You must report the exchange of like-kind property on Form 8824, Like-Kind Exchanges. Report the exchange even though no gain or loss is recognized.
You can use a “qualified intermediary” to help you facilitate the transfer of property. This person enters into a written exchange agreement with you to acquire and transfer the property you give up and to acquire the replacement property and transfer it to you.
The exchange of a fishing permit/license for another fishing permit/license qualifies for nontaxable exchange treatment under Internal Revenue Code (IRC) Section 1031.
Any time fishermen sell their permits/licenses for more than the current adjusted basis (purchase price minus claimed amortization); they incur a tax liability.
For example, if Captain Fisher buys a fishing permit for $100,000 in April 1994 and sells it in May 2002 for $150,000, he must pay taxes on the $50,000 capital gain. In addition, because he has amortized the permit/license (taken a deduction on his returns), he would also be liable for taxes on the amortized amount of $53,336. This amount would be reported as an ordinary gain.
If the fisherman does a like-kind exchange under IRC Section 1031, he can defer the capital and ordinary gains. This code section allows owners to defer the gain on the disposal of business property if, rather than selling for cash, they trade it for another item of business property of a similar type, i.e. a fishing permit for a fishing permit. The tax liability is not eliminated; it is deferred until the sale of the newly acquired fishing permit/license.
This means, for example, if Captain Fisher’s original $100,000 fishing permit has a current value of $150,000 and he trades it for another one, he can defer the payment of tax on the $50,000 capital gain and $53,336 ordinary gain until he sells the new fishing permit. Basis in the new permit is adjusted by the gain deferred.
If the fisherman receives money or unlike property in the trade, or his permit had a note that the other party assumed, he might have to report a gain on his tax return.
Report the exchange of like-kind property on Form 8824, Like-Kind Exchanges. For more information about like-kind exchanges, see Publication 544, Sales and Other Dispositions of Assets.
An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. If you finance the buyer’s purchase of your property, instead of having the buyer get a loan or mortgage from a third party, you probably have an installment sale. In an installment sale, you report part of your gain when you receive each payment. You cannot use the installment method to report a loss. For more information about installment sales, see Publication 537, Installment Sales.