Like Kind exchange mandatory

[mactoolsix]

I'm sure I've read that if you qualify for a like kind exchange, it's mandatory - you can't "elect out" - but I cannot find the proper citation for this.

Have a client that traded in a vehicle used for business for a new one. He has a tax deferred loss on the deal, so if possible he'd prefer that, however I'm sure it's not an option.

Can anyone provide a cite for this?

Thanks,
Mike

[Burke]

I never heard about it being mandatory. People sell stuff and buy new stuff all the time -- and they don't have to do a like-kind exchange. He had a loss even with depreciation of the business asset?

[Roland Slugg]

People sell stuff and buy new stuff all the time -- and they don't have to do a like-kind exchange.

No, they don't when they sell "stuff." But the post here was about an exchange.

Yes, LKE treatment is mandatory if the conditions are met. See Code §1031.

[MichaelG]

Elect out

Like-kind-exchange treatment is mandatory if all conditions are met. But you can elect out by attaching a statement to the return.

[Roland Slugg]

It never fails to amaze me how many people post replies here that are based on what they have heard or what they think or what they feel, but seldom based on what they know based on what they have read ... preferably in the Code, Regs or some other authoritative source.

C'mon, folks ... people who pose questions here are looking for authoritative answers, not guesses. They can do their own guessing. Hopefully, when they return to read the responses, they will give more weight to those with cites to references they can refer to on their own, even if the cite is just to something like form instructions or an IRS Pub.

Correct answers to most questions can easily be found in five minutes or less. Presumably everyone preparing income tax returns for a fee has access to the Code and Regs, but even those who don't can often locate reliable answers to many of their questions by doing a simple online search. I entered the words "like kind exchange mandatory" in Google and got dozens of on-point hits in about two seconds. This is not difficult.

Elect out. Like-kind-exchange treatment is mandatory if all conditions are met. But you can elect out by attaching a statement to the return.

Is that so? And just what would that statement say? "We don't like the fact that §1031 is mandatory, so we are electing out."

Let me know if that works.

[Burke]

My, my, we have been doing too many tax returns....but I will give you my mea culpa for being too fast on the draw. I was looking at it as a sale and repurchase. But because he traded the car in and it was used in his trade or business,it is handled as a LKE. "Taxpayers cannot elect out of like-kind exchange treatment. Unlike the involuntary conversion rules and installment sale rules, the like-kind exchange rules are mandatory. If it is not advantageous to use like-kind exchange, structure the transaction a different way. There is no legal way to 'elect out' of the like-kind exchange rules once the transaction is done." (NATP TaxPro Journal article, Summer 2008.) Another source says even if you sell the car to a dealer and buy the new one as a separate transaction from the same dealer, it will still be treated as a like-kind exchange stating that they are two mutually dependent transactions. If the first vehicle was sold to a 3rd party, and a new one purchased from another source, then there is no like-kind exchange.

[Gary2]

There is a sort-of exception for depreciation purposes only. See Pub. 946, under "Property Acquired in a Like-Kind Exchange or Involuntary Conversion", particularly under "Election out". This doesn't change the recognized gain or loss, just the way the depreciation is handled.

There's also a separate section titled "Deductions for Passenger Automobiles Acquired in a Trade-in", because of the depreciation limits on cars. There are references to the regs, as well as the electing out section.

[mactoolsix]

Let me say thanks to those that responded!!

Burke - your post about "Another source says even if you sell the car to a dealer and buy the new one as a separate transaction from the same dealer, it will still be treated as a like-kind exchange" was the one I had read before - do you happen to have the source for that?

I have studied IRC §1031 and also read and re-read the pubs on this issue. While I've never found mandatory, I've never found where you can choose to not do a LKE.
Here's the closet I've found:

http://www.law.cornell.edu/uscode/text/26/1031

(c) Loss from exchanges not solely in kind

If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.

In English (I think it means):
If the loss is caused by "boot" then the loss is not recognized. If the loss is not caused by "boot" then there is no 1031 exchange.

Appreciate the time everyone spends trying to help - it's already been a long tax season!

Mike

[Burke]

Burke - your post about "Another source says even if you sell the car to a dealer and buy the new one as a separate transaction from the same dealer, it will still be treated as a like-kind exchange" was the one I had read before - do you happen to have the source for that? Appreciate the time everyone spends trying to help - it's already been a long tax season! Mike

http://www.taxalmanac.org/index.php/Like-Kind_Exchange

( Scroll to the bottom. There is an example following.)

I also found the same reference in IRS Pub 925 on page 35 under Sales and Exchanges.