Sales and Exchanges — 2025 Publ 225 (PDF)

If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. This section explains certain rules for determining whether any gain you have is taxable and whether any loss you have is deductible.

A sale is a transfer of property for money or a mortgage, a note, or other promise to pay money. An exchange is a transfer of property for other property or services.

Property sold or exchanged may include the sale of a portion of a MACRS asset. For details, see Partial Dispositions of MACRS Property in chapter 1 of Pub. 544.

Determining Gain or Loss

You usually realize a gain or loss when you sell or exchange property. If the amount you realize from a sale or exchange of property is more than its adjusted basis, you have a gain. If the adjusted basis of the property is more than the amount you realize, you have a loss.

Basis and adjusted basis. The basis of property you buy is usually its cost. The adjusted

Useful Items You may want to see:

Publication

334

523

544

550

908

334 Tax Guide for Small Business

523 Selling Your Home

544 Sales and Other Dispositions of Assets

550 Investment Income and Expenses

908 Bankruptcy Tax Guide

Form (and Instructions)

982

982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)

Sch D (Form 1040) Sch D (Form 1040) Capital Gains and

Losses

Sch F (Form 1040) Sch F (Form 1040) Profit or Loss From

Farming

1099-A 1099- A cquisition or Abandonment of

Secured Property

1099-C

1099- C ancellation of Debt

4797

8824

8949

8960

8995

4797 Sales of Business Property

8824 Like-Kind Exchanges

8949 Sales and Other Dispositions of Capital Assets

8960 Net Investment Income Tax—Individuals, Estates, and Trusts

8995 Qualified Business Income Deduction Simplified Computation

8995-A 8995-A Qualified Business Income

Deduction

Publication 225 (2025) Chapter 8 Gains and Losses 51

basis of the property is the basis plus certain additions and minus certain deductions. See chapter 6 for more information about basis and adjusted basis.

Amount realized. The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage.

If the liabilities relate to an exchange of multiple properties, see Multiple Property Ex- changes in chapter 1 of Pub. 544.

Amount recognized. Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. A recognized gain is a gain you must include in gross income and report on your income tax return. A recognized loss is a loss you deduct from gross income. However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. See Like-Kind Exchanges next. Also, a loss from the disposition of property held for personal use is not deductible.

Like-Kind Exchanges

Generally, if you exchange real property you use in your business or hold for investment solely for other like-kind business or investment real property, you do not recognize the gain or loss from the exchange. However, if you also receive non-like-kind property or money as part of the exchange, you recognize gain to the extent of the value of the other property or money you received in the exchange. You do not recognize any losses. In general, your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive in the exchange. See Qualifying property , later, for de- tails and exceptions.

The exchange of property for the same kind of property is the most common type of nontaxable exchange. To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following (discussed later).

Qualifying property.
Like-kind property.

For more information on like-kind exchanges, see Pub. 544.

Multiple-party transactions. The like-kind exchange rules also apply to property exchanges that involve three- and four-party transactions. Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section.

Receipt of title from third party. If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements.

Basis of property received. If you receive property in a like-kind exchange, generally the basis of the property will be the same as the basis of the property you gave up. See chapter 6 for more information on basis.

Money paid. If, in addition to giving up like-kind property, you pay money in a like-kind exchange, the basis of the property received is the basis of the property given up, increased by the money paid.

Example. You own farmland with a barn. The combined adjusted basis of the properties is $70,000 and the FMV is $150,000. You are interested in another tract of farmland, with a larger barn, worth $200,000. You exchange your existing property and $50,000 in cash for the new property. Your basis in the new property is $120,000 ($70,000 adjusted basis in your old property plus $50,000 in cash paid).

Reporting the exchange. Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824. The Instructions for Form 8824 explain how to report the details of the exchange.

If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. See chapter 9 for more information.

Qualifying property. In a like-kind exchange, both the real property you give up and the real property you receive must be held by you for investment or for productive use in your trade or business. The nonrecognition rules for like-kind exchanges apply only to exchanges of real property (as defined in Regulations section 1.1031(a)-3). The following are examples of property that may qualify.

Land and improvements to land.
Unsevered natural products of land.
Water and air space superjacent to land.
An intangible interest in real property including fee ownership; co-ownership; a leasehold; an option to acquire real property; an easement; and stock in a cooperative housing corporation.
Real property that, on the date it is transferred in an exchange, is real property under the law of the state or local jurisdiction in which that property is located.

Nonqualifying property. The rules for like-kind exchanges do not apply to exchanges of the following property.

Real property used for personal purposes, such as your home.
Real property held primarily for sale.
Any personal or intangible property that is not defined as an interest in real property in Regulations section 1.1031(a)-3(a)(5).

You may have a nontaxable exchange under other rules. See Other Nontaxable Exchanges in chapter 1 of Pub. 544.

Special rule for stock in a mutual ditch, reservoir, or irrigation company. For purposes of real property, stock in a mutual ditch, reservoir, or irrigation company is treated as real property if both of the following conditions are met at the time of the trade.

The mutual ditch, reservoir, or irrigation company is an organization described in section 501(c)(12)(A) of the Internal Revenue Code (determined without regard to the percentage of its income that is collected from its members for the purpose of meeting losses and expenses).
The shares in the company have been recognized by the highest court of the state in which the company was organized or by applicable state statute as constituting or representing real property or an interest in real property.

Like-kind property. To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Generally, real property exchanged for real property qualifies as an exchange of like-kind property. For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange.

Note. Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange.

Partially nontaxable exchange. If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. If you realize a loss on the exchange, no loss is deductible. However, see Unlike property given up below.

Example 1. You trade farmland that cost $130,000 for $10,000 cash and other land to be used in farming with an FMV of $150,000. You have a realized gain of $30,000 ($150,000 FMV of new land + $10,000 cash − $130,000 basis of old farmland = $30,000 realized gain). However, only $10,000, the cash received, is recognized gain (included in income).

Example 2. Assume the same facts as in Example 1, except that, instead of money, you received a tractor with an FMV of $10,000. Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property).

Example 3. Assume in Example 1 that the FMV of the land you received was only $115,000. You have a realized loss of $5,000 ($115,000 FMV + $10,000 cash – $130,000 basis of old farmland = $5,000 loss). However, your $5,000 loss is not recognized.

Unlike property given up. If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property.

52 Chapter 8 Gains and Losses Publication 225 (2025)

Liabilities. If, in a like-kind exchange, you transfer property subject to debt, the debt transferred is considered the same as the receipt of unlike property. For purposes of figuring your realized gain, add any liabilities assumed by the other party to your amount realized. Subtract any liabilities of the other party that you assume from your amount realized. For more information, see Partial Nontaxable Exchanges in chapter 1 of Pub. 544.

Like-kind exchanges between related per- sons. Special rules apply to like-kind exchanges between related persons. These rules affect both direct and indirect exchanges. Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. The gain or loss on the original exchange must be recognized as of the date of the later disposition. The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange.

Related persons. Under these rules, related persons include, for example, you and a member of your family (spouse, sibling, parent, child, etc.), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits.

For the complete list of related persons, see Related persons in chapter 2 of Pub. 544.

If you transfer property using a qualified