338 Planning and Forecasting
to the difference between the sale price and Plant Supply’s basis in the build-
ing. If Morris purchased the molding company by merging or purchasing its
assets for cash, then the capital gain to be taxed here may be minimal because
it would consist only of the growth in value since this purchase plus any
amount depreciated after the acquisition. If, however, Morris acquired the
molding company through a purchase of stock, his basis would be the old com-
pany’s preacquisition basis, and the capital gain may be considerable. Either
way, it would surely be desirable to avoid taxation on this capital gain.
The Code affords Morris the opportunity to avoid this taxation if, instead
of selling his old facility and buying a new one, he can arrange a trade of the old
for the new so that no cash falls into his hands. Under Section 1031 of the
Code, if properties of “like kind” used in a trade or business are exchanged, no
taxable event has occurred. The gain on the disposition of the older facility is
merely deferred until the eventual disposition of the newer facility. This defer-
ral is accomplished by calculating the basis in the newer facility, starting with
its fair market value on the date of acquisition, and subtracting from that
amount the gain not recognized on the sale of the older facility. That process
builds the unrecognized gain into the basis of the newer building so that it will
be recognized (along with any future gain) upon its later sale. There has been
considerable confusion and debate over what constitutes like-kind property
outside of real estate, but there is no doubt that a trade of real estate used in
business for other real estate to be used in business will qualify under Section
1031.
Although undoubtedly attracted by this possibility, Morris would quickly
point out that such an exchange would be extremely rare since it is highly un-
likely that he would be able to find a new facility which is worth exactly the
same amount as his old facility, and thus any such exchange would have to in-
volve a payment of cash as well as an exchange of buildings. Fortunately, how-
ever, Section 1031 recognizes that reality by providing that the exchange is still
nontaxable to Morris so long as he does not receive any non-like-kind property
(i.e., cash). Such non-like-kind property received is known as boot, and would
include, besides cash, any liability of Morris’s (such as his mortgage debt) as-
sumed by the exchange partner. The facility he is purchasing is more expensive
than the one he is selling, so Morris would have to add some cash, not receive
it. Thus, the transaction does not involve the receipt of boot and still qualifies
for tax deferral. Moreover, even if Morris did receive boot in the transaction,
he would recognize gain only to the extent of the boot received, so he might
still be in a position to defer a portion of the gain involved. Of course, if he re-
ceived more boot than the gain in the transaction, he would recognize only the
amount of the gain, not the full amount of the boot.
But Morris has an even more compelling, practical objection to this plan.
How often will the person who wants to purchase your facility own the exact fa-
cility you wish to purchase? Not very often, he would surmise. In fact, the pro-
posed buyer of his old facility is totally unrelated to the current owner of the
facility Morris wishes to buy. How then can one structure this as an exchange of