Internal Revenue Service
Revenue Ruling
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smRev. Rul. 68-36
1968-1 C.B. 357
Sec. 1031
IRS Headnote
The basis of two properties acquired in an exchange which qualifies under section 1031 of the Internal Revenue Code of 1954 shall be the same as the basis in the exchanged property and such basis shall be allocated between the two properties acquired according to their respective fair market values on the date of the exchange.
Full Text
Rev. Rul. 68-36
Advice has been requested as to the proper method of allocating the basis in a piece of income-producing real property to two pieces of like property acquired in an exchange which qualifies under section 1031(a) of the Internal Revenue Code of 1954.
M corporation owns improved lots 1, 2, and 3 and is in the business of owning and leasing real property. O corporation owns improved lot 4 and is in the business of owning and leasing real property. Lots 1 and 4 are contiguous and, although the buildings are separate structures, certain facilities (the lobby, elevator, and boiler and tank in the basement) are common facilities utilized by both buildings. It is proposed that M corporation transfer lots 2 and 3 to O corporation in exchange for lot 4. The value of lots 2 and 3 is in the aggregate equal to the value of lot 4. Neither corporation will assume any liabilities in connection with the exchange. The corporations have no present intention to sell or otherwise dispose of these properties after the exchange and they will hold them for the same purpose as they were held before the exchange, as rental properties.
Section 1031(a) of the Code provides, in pertinent 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 use in trade or business or for investment.
Section 1031(d) of the Code provides, in pertinent part, that if property is acquired in an exchange described in section 1031 of the Code, the basis shall be the same as that of the property exchanged.
In E. C. Laster v. Commissioner , 43 B.T.A. 159 (1940), reversed and affirmed on other issues, 128 F.2d 4 (1942), the taxpayer exchanged oil leases for oil leases, including the well equipment on each. The court sustained the Commissioner's allocation of the basis of the property exchanged to the property acquired according to the relative values of the properties acquired at the date of the exchange.
Since the exchange of properties by M corporation and O corporation complies with Section 1031(a) of the Code, there can be no recognition of gain or loss to either M or O corporation.
Accordingly, the basis to O corporation in the two acquired properties shall be the same as the basis in the exchanged property allocated between the two properties received on the basis of their respective fair market values on the date of the exchange.
To illustrate this principle, assume that lot 4, with a basis of $110,000, $100,000 of which is attributable to land and $10,000 of which is attributable to building, is exchanged for lots 2 and 3 under the provisions of section 1031 of the Code. Each of these lots has a building on it. The fair market values of lots 2 and 3 are:
lot 2 lot 3
land____________________________________ $ 20,000 $ 30,000
building________________________________ 80,000 120,000
________ ________
$100,000 $150,000
Computation of the basis of each lot to O corporation is as
follows:
lot 2 lot 3
$100,000 $150,000
___________ = 2/5 ________ = 3/5
250,000 250,000
Total Basis:
2/5 X $110,000 = $44,000 3/5 X $110,000 = $66,000
Basis allocated to land and building:
lot 2 lot 3
land:
$ 20,000 $ 30,000
___________ = 1/5 ________ = 1/5
100,000 150,000
1/5 X $ 44,000 = $ 8,800 1/5 X $ 66,000 = $13,200
building:
$ 80,000 $120,000
___________ = 4/5 ________ = 4/5
100,000 150,000
4/5 X $ 44,000 = $35,200 4/5 X $ 66,000 = $52,800
Therefore, the basis to O corporation in the two acquired properties will be $44,000 for lot 2 ($8,800 allocated to the land and $35,200 to the building) and $66,000 for lot 3 ($13,200 allocated to the land and $52,800 to the building).