J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

6.1 Trades of Like-Kind Property

You may not have to pay tax on gain realized on the “like-kind” exchange of business or investment property. By making a qualifying exchange, you can defer the gain. On the other hand, a loss is not deductible unless you give up “unlike” property (not like-kind); see below. For tax-free gain treatment, you must trade property held for business use or investment for like-kind business or investment property. If the properties are not simultaneously exchanged, the time limits for deferred exchanges (6.4) must be satisfied. The entire gain is deferred only if you do not receive any “boot” gain is taxed to the extent of boot received (6.3). Where gain on a qualifying exchange is deferred and not immediately taxed, it may be taxable in a later year when you sell the property because your basis for the new property is generally the same as the basis for the property you traded (5.16 − 5.20).

If you make a qualifying like-kind exchange with certain related parties, tax-free treatment may be lost unless both of you keep the exchanged properties for at least two years (6.6).

The term like-kind refers to the nature or character of the property, that is, whether real estate is traded for real estate. It does not refer to grade or quality, that is, whether the properties traded are new or used, improved or unimproved. In the case of real estate, land may be traded for a building, farm land for city lots, or a leasehold interest of 30 years or more for an outright ...