Like-Kind Exchange: A Non-Recognition Provision
A like-kind exchange is type of “non-recognition provision.” According to section 1001(c) of the Internal Revenue Code, all realized gains and losses must be recognized “except as otherwise provided in this subtitle.” A like-kind exchange is one of the qualified exceptions, serving as the proto-typical “non-recognition provision.”
Non-recognition is conferred on a like-kind exchange on the basis that the form of the taxpayer’s investment changes while the substance of the investment does not. In a like-kind exchange, the realized gain or loss usually never disappears; rather, the unrecognized gain or loss typically carries over into the new asset. When the new asset is sold or exchanged in a taxable transaction, the realized gain or loss from the first transaction will then be recognized.
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