Internal Revenue Service (I.R.S.)

Revenue Ruling (Rev. Rul.)

LIKE KIND EXCHANGE; REMAINDER INTERESTS IN FARM LAND

Section 1031 - Exchange of Property Held for Productive Use or Investment,  26 CFR 1.1031(a)-1: Property held for productive use in trade or business or for investment.

Like kind exchange; remainder interests in farm land. The exchange of a remainder interest in one-half of a tract of land for a remainder interest in one-half of another tract of land by a taxpayer who farms and will continue to farm both tracts for profit and who as a result of the exchange will own one tract entirely in fee simple and will have a life estate in the other tract is an exchange of like kind property and qualifies for nonrecognition of gain or loss under section 1031(a) of the Code; Rev. Rul. 72-601 distinguished.

Advice has been requested whether, under the circumstances described below, the exchange of a remainder interest in one property for a remainder interest in another property will qualify for nonrecognition of gain or loss under the provisions of section 1031(a) of the Internal Revenue Code of 1954.

A and B, who were husband and wife, owned and farmed two tracts of land in a community property state prior to A's death in 1975.  Under the terms of A's will, B received a life estate in A's one-half of the community property, with the remainder interest going to the children of A and B. Therefore, B owns one-half of each tract of land in fee simple and has a life estate in the other half of each tract.  B farms both tracts of land at the present time for profit.

Under applicable state law, B's fee simple interest is divisible into a life estate and a remainder interest.  B proposes to exchange the remainder interest in one-half of one of the tracts of land for the remainder interest of the children in one-half of the other tract of land.  No money or other property will be transferred in the exchange since the actuarially determined dollar values of the remainder interests are equal.  As a result of such exchange, B will own one tract entirely in fee simple and will have a life estate in all the other tract.  After the exchange, B will continue to farm both tracts of land for profit.

Section 1031(a) of the Code provides, in part, that no gain or loss shall be recognized if property held for productive use in trade or business or for investment is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.

Section 1.1031(a)-1(b) of the Income Tax Regulations provides, in part, that as used in section 1031(a) of the Code, the words 'like kind' have reference to the nature or character of the property and not to its grade or quality. One kind or class of property may not, under that section, be exchanged for property of a different kind or class.

Since the remainder interest of B in one-half of one tract of farm land is of the same nature or character as the remainder interest of the children in one-half of the other tract of farm land, the remainder interests are like kind property within the meaning of section 1.1031(a)-1(b) of the regulations. Therefore, the exchange of B's remainder interest for the children's remainder interest will be an exchange of farm property held for productive use in trade or business solely for like kind property to be held by B for productive use in the business of farming.

Accordingly, the exchange of B's remainder of one interest in one-half tract of land for the remainder interest in one-half of the other tract of land will qualify for nonrecognition of gain or loss under the provisions of section 1031(a) of the Code.

The conclusions in Rev. Rul. 72-601, 1972-2 C.B. 467, are distinguishable from the conclusion in the instant Revenue Ruling. Rev. Rul. 72-601 concludes (1) that a transfer of a life estate in one parcel of real property in return for a remainder interest in another does not qualify as a like kind exchange under section 1031(a) of the Code because the remainder interest received is an advance rental in consideration for the transfer of a right to use real property for a period of years and (2) that a transfer of a remainder interest in one parcel of real property in return for a life estate with an expectancy of less than 30 years in another does not qualify as a like kind exchange under section 1031(a) because the nature and character of the two property interests are not the same.