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NO, WE CAN'T. AT LEAST NOT WITH STOCK.

May 06, 2008

If I had a dollar for every time somebody asked me if you can use corporate stock in a Section 1031 like-kind exchange, I'd have several dollars by now. A reader asks the question with a little different twist:

Can a 1031 seller purchase real estate in a "C" corp by purchasing all the stock?

The "C" corp seller wants to sell all the stock rather then the real estate out of the "C" corp so they can avoid double taxation.

What I believe has happened here is that a taxpayer has sold property in a deferred exchange and has escrowed the proceeds. If this is all done properly, the taxpayer can direct the escrow company to purchase replacement property with the escrowed proceeds and distribute the property. The tax law will treat this as a tax-deferred Section 1031 exchange of the sold property for the property distributed out of escrow.

Unfortunately for the taxpayer, it doesn't work with stock. The tax law excludes "stocks, bonds, or notes" from eligibility for tax-deferred swaps under Section 1031 (although like-kind swaps with stock were available as recently as 1918).

A taxpayer could acquire the land with the escrowed funds from the corporation and still have a qualifying exchange, but acquiring the stock doesn't work.

The corporation owner could defer gain by exchanging the land out, but a 1031 deal does nothing to help avoid a second tax when he actually tries to take the cash out of the corporation.

Tags: like-kind.Section 1031.

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