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Recommendation for Simplification

The Joint Committee staff recommends that, for purposes of determining whether property satisfies the holding requirement under the section 1031 like-kind exchange rules, a taxpayer's holding period and use of property should include the holding period of and use of property by the transferor, in the case of property: (1) contributed to a corporation or partnership in a transaction described in section 351 or 721; (2) acquired by a corporation in connection with a transaction qualifying as a reorganization under section 368; (3) distributed by a partnership to a partner; or (4) distributed by a corporation in a transaction to which section 332 applies. In addition, the Joint Committee staff recommends that property whose use changes should not qualify for like-kind exchange treatment unless it is held for productive use in a trade or business or investment for a specified period of time.

The proposal focuses the holding requirement on the use of the property rather than the legal form in which the property is owned. Focusing on the use of the property would allow taxpayers to avoid engaging in transactions solely to meet the holding requirement under current law. Rather, taxpayers could structure their trade or business or investments in the most efficient manner, but would qualify for exchange treatment only if the property is to be held for productive use in a trade or business or held for investment. The proposal also would reduce complexity by removing the confusion and uncertainty under section 1031 with respect to whether a taxpayer is considered to hold property for productive use in a trade or business or for investment when the property has been recently transferred.

Additionally, under the proposal, property whose use changes would not qualify for like-kind exchange treatment unless it is held for productive use in a trade or business or for investment for a specified period of time. This requirement would prevent (1) relinquished property from being converted from personal use to investment (or trade or business) use shortly before an exchange, or (2) replacement property from being converted from investment (or trade or business) use to personal use shortly after an exchange.

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