Checklist · Tax

Structuring a Like-Kind Exchange or an Opportunity Zone Investment: A Practical Checklist

26 U.S.C. § 1001

Type: Checklist
Jurisdiction: National
Date: 2024-10-07
Topic: Tax

This checklist covers structuring a like-kind exchange from pre-listing through reporting, evaluating an opportunity zone investment, handling an installment sale, and responding to an involuntary conversion. The exchange sequence is organized around the two deadlines and the constructive receipt principle, with the pre-closing steps that cannot be performed afterward marked as such. Separate sections cover reverse and improvement variations, partnership and co-ownership mechanics that require months of lead time, related party limitations, and the boot computation that determines whether deferral is complete. Compliance items for opportunity funds include the semiannual asset tests, substantial improvement, and the written working capital plan that is the most commonly missed requirement in the regime. Each item names the authority and the document that proves it.

Structuring a Like-Kind Exchange or an Opportunity Zone Investment: A Practical Checklist

Tax > Like-Kind Exchanges, Opportunity Zones, and Gain Deferral | Published 7 October 2024 - Updated 13 July 2026 | UpLaw - uplaw.us

How to use this checklist

Track A is the like-kind exchange, and its first section contains steps that cannot be performed after closing. Track B is opportunity zone. Track C is installment sale. Track D is involuntary conversion. Track E is reporting and permanent records.

If a client calls after the relinquished property has closed and the proceeds have been received, the exchange is over. Say so immediately rather than looking for a fix.

Authorities: 26 U.S.C. § 1001 (recognition); 26 U.S.C. § 1011, 26 U.S.C. § 1012, 26 U.S.C. § 1014, 26 U.S.C. § 1015, 26 U.S.C. § 1223 (basis and holding); 26 U.S.C. § 1031 (exchange); 26 U.S.C. § 1033 (involuntary conversion); 26 U.S.C. § 453, 26 U.S.C. § 453A (installment); 26 U.S.C. § 1245, 26 U.S.C. § 1250 (recapture); 26 U.S.C. § 1231 (business property); 26 U.S.C. § 721, 26 U.S.C. § 704, 26 U.S.C. § 706 (partnerships); 26 U.S.C. § 1041 (spousal transfers); 26 U.S.C. § 121 (residence); 26 U.S.C. § 61 (income); 26 U.S.C. § 6045 (reporting); 26 C.F.R. Part 1.

Track A, Step 1: Before the property is listed

[ ] Confirm the property is real property held for productive use in a trade or business or for investment under 26 U.S.C. § 1031.
[ ] Confirm it is not held primarily for sale — no subdivision and development for resale, no flip pattern, no dealer activity.
[ ] Document investment intent: holding period, rental history, prior treatment on returns.
[ ] For mixed-use property, confirm rental days and personal use days satisfy the safe harbor in the periods before and after.
[ ] Confirm the owner of record is the taxpayer who will acquire the replacement property. A partnership owns partnership property; individual partners cannot exchange their interests.
[ ] If the property is held by a partnership and partners want different outcomes, start the drop-and-swap analysis now under 26 U.S.C. § 721, 26 U.S.C. § 704, and 26 U.S.C. § 706 — it requires months, not weeks.
[ ] Model the taxable sale: amount realized, adjusted basis, realized gain, recapture under 26 U.S.C. § 1245 and 26 U.S.C. § 1250, and cash remaining after tax.
[ ] Discuss the exit with the client: sale for cash later, or hold until a step-up under 26 U.S.C. § 1014. The answer determines whether an exchange is worth doing.
[ ] Identify a qualified intermediary and confirm no disqualification: no person who acted as the taxpayer's employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the preceding two years, and no related party.
[ ] Diligence the intermediary: segregated accounts, bonding or insurance, financial condition, and whether funds are held in the taxpayer's name.

Track A, Step 2: The contract

[ ] Include exchange cooperation language: the buyer cooperates at no cost, expense, or liability and consents to assignment to a qualified intermediary.
[ ] Confirm the closing agent has written instructions to send proceeds directly to the intermediary.
[ ] Confirm no provision permits the seller to direct or receive funds.
[ ] If seller financing is contemplated, decide now whether the intermediary will hold the note or whether it will be treated as boot under 26 U.S.C. § 453.
[ ] Prepare the business purpose memorandum; Gregory v. Helvering and Frank Lyon Co. v. United States make it worth the hour.

Track A, Step 3: Closing on the relinquished property

[ ] Exchange agreement executed before closing, expressly restricting the taxpayer's right to receive, pledge, borrow, or otherwise obtain the benefits of the funds.
[ ] Assignment of the taxpayer's rights under the purchase and sale agreement to the intermediary, with written notice to the buyer.
[ ] Proceeds wired directly to the intermediary. Not to the client. Not to counsel's trust account. Not to an escrow the client can direct.
[ ] Confirm receipt by the intermediary in writing.
[ ] Calendar day 45 and day 180 the same day, and confirm both dates to the client by letter.
[ ] Note that day 180 is the earlier of 180 days or the return due date including extensions.

Track A, Step 4: Identification (days 1–45)

[ ] Identification must be in writing.
[ ] Signed by the taxpayer.
[ ] Delivered on or before day 45 — not postmarked, delivered.
[ ] Delivered to a person involved in the exchange who is not the taxpayer or a disqualified person. The intermediary is the standard recipient.
[ ] Property described unambiguously — legal description or street address, and for a portion, the specific portion.
[ ] Select the rule and confirm compliance:
- [ ] Three-property rule — up to three properties, any value.
- [ ] Two-hundred-percent rule — any number, aggregate value not exceeding twice the relinquished property's value.
- [ ] Ninety-five-percent rule — any number, and the taxpayer must actually receive at least ninety-five percent of the identified value.
[ ] Identify more than one property. Deals fail; a single identification with a failed closing is a fully taxable sale.
[ ] Retain proof of delivery with the date.
[ ] Any revocation must be in writing and delivered before the end of day 45.
[ ] If day 45 will be missed, tell the client immediately; there is no extension absent declared disaster relief.

Track A, Step 5: Boot computation (before the replacement closing)

[ ] Relinquished property: value, mortgage, equity.
[ ] Replacement property: value, mortgage, equity.
[ ] Buy up or equal in value. Any shortfall is boot.
[ ] Reinvest all the equity. Any cash taken is boot.
[ ] Debt relief (old mortgage minus new mortgage, if positive) is boot.
[ ] Cash paid by the taxpayer offsets liability relief; cash received does not offset liability assumed.
[ ] Exchange expenses paid from proceeds generally reduce boot.
[ ] Compute recognized gain = lesser of realized gain or net boot.
[ ] Deliver the computation to the client before closing, in writing. Debt-relief boot is the surprise that generates malpractice claims.

Track A, Step 6: Replacement closing and basis

[ ] Assignment of the replacement purchase agreement to the intermediary, with notice to the seller.
[ ] Direct transfer from the intermediary to the taxpayer.
[ ] Confirm the acquiring taxpayer is the same taxpayer that relinquished.
[ ] Confirm the property will be held for business or investment; document the intent.
[ ] Compute new basis: old basis + cash contributed + gain recognized − cash received + debt assumed − debt relieved. Cross-check against 26 U.S.C. § 1011 and 26 U.S.C. § 1012.
[ ] Split basis for depreciation: carryover portion continues the old schedule; excess basis is newly placed in service. Two streams on one building is the most common post-exchange return error.
[ ] Confirm holding period tacking under 26 U.S.C. § 1223.
[ ] Record the embedded recapture position under 26 U.S.C. § 1245 and 26 U.S.C. § 1250 for future reference.

Track A, Step 7: Variations

Reverse exchange

[ ] Qualified exchange accommodation arrangement in writing before parking begins.
[ ] Exchange accommodation titleholder identified and engaged.
[ ] Identify the relinquished property within 45 days of parking.
[ ] Complete within 180 days of parking.
[ ] Document taxpayer loans or guarantees to the accommodation titleholder within the safe harbor.

Improvement exchange

[ ] Confirm the construction schedule against day 180. Only improvements completed and in place at transfer count toward value received.
[ ] Accommodation titleholder holds title while improvements are made.
[ ] Exchange funds disbursed for improvements under the arrangement, not to the taxpayer.
[ ] Identify the replacement property including the improvements with sufficient specificity.

Related parties

[ ] Identify whether any counterparty is a related party.
[ ] If so, confirm neither party will dispose within two years, or that an exception applies (death, involuntary conversion, no tax-avoidance purpose).
[ ] Scrutinize intermediary structures whose effect is to cash out a related party.

Other limits

[ ] Foreign real property is not like kind to United States real property.
[ ] If the replacement will later become a residence, note the 26 U.S.C. § 121 holding requirement and the exclusion of depreciation-attributable gain.
[ ] For transfers between spouses or incident to divorce, note 26 U.S.C. § 1041 nonrecognition with carryover basis.

Track B: Opportunity zone investment

[ ] Identify the capital gain, its date, and its character. Any capital gain qualifies — it need not be real property gain.
[ ] Confirm the investment is made within 180 days of the gain.
[ ] Confirm only the gain amount is being invested; the return of capital may be retained.
[ ] Confirm the fund is a qualifying entity and has self-certified.
[ ] Confirm the semiannual asset test: the required percentage of assets in qualified zone property, tested twice yearly, with penalties for failure.
[ ] For existing buildings, confirm substantial improvement: additions to basis exceeding the adjusted basis of the building within thirty months, or original use in the zone.
[ ] For an operating business, confirm the written working capital plan and schedule. This is the most commonly missed requirement in the entire regime.
[ ] Review the fund agreement for inclusion events that would accelerate the deferred gain — distributions exceeding basis, transfers, redemptions.
[ ] Confirm the client understands the ten-year hold requirement for the exclusion election.
[ ] Underwrite the underlying investment on its own merits. The exclusion is worth exactly as much as the appreciation.
[ ] Confirm the client is not constructively receiving a promise that the tax rules will rescue a weak deal.
[ ] Note that under Loper Bright Enterprises v. Raimondo the heavily regulatory content of this regime faces independent judicial construction; Mayo Foundation for Medical Education & Research v. United States previously supplied the deference framework.

Track C: Installment sale

[ ] Confirm the disposition qualifies — at least one payment received after the close of the taxable year, and not a dealer disposition, inventory, or publicly traded property.
[ ] Note 26 U.S.C. § 453 applies automatically; election out must be affirmative.
[ ] Compute year-one recapture. 26 U.S.C. § 1245 and 26 U.S.C. § 1250 recapture is recognized in the year of sale regardless of payments received.
[ ] Confirm the down payment covers the year-one tax. If it does not, restructure before signing.
[ ] Compute the gross profit ratio.
[ ] Assess the 26 U.S.C. § 453A interest charge on larger obligations.
[ ] Confirm no pledge of the installment note is contemplated; a pledge is treated as a payment.
[ ] For contingent payments, address basis recovery; note Burnet v. Logan on open transactions and that the regulations have narrowed it.
[ ] For related party resales within two years, note the acceleration rule.
[ ] Confirm character under 26 U.S.C. § 1231 and the recapture of prior ordinary losses.
[ ] Secure the note: mortgage, guarantee, or letter of credit. Deferral is worthless if the buyer defaults.

Track D: Involuntary conversion

[ ] Identify the event: destruction, theft, seizure, requisition, or condemnation.
[ ] Compute the gain. Insurance or award proceeds exceeding adjusted basis is gain, even though the client experienced a loss.
[ ] Determine the replacement period under 26 U.S.C. § 1033: two years from the close of the first taxable year in which gain is realized, or three years for condemned real property held for productive use in a trade or business or for investment.
[ ] Calendar the replacement deadline and confirm it to the client in writing.
[ ] Apply the correct standard: "similar or related in service or use" for most conversions — narrower than like-kind — relaxed to like-kind for condemnations of business or investment real property.
[ ] Confirm the replacement property is acquired by the same taxpayer.
[ ] Compute basis in the replacement: cost less unrecognized gain.
[ ] Ask about casualties and condemnations in every real estate engagement; clients do not report them as tax events.

Track E: Reporting and permanent records

[ ] Report the exchange for the year the relinquished property transferred.
[ ] Reconcile to 26 U.S.C. § 6045 broker reporting of gross proceeds.
[ ] Report any recognized boot gain and its character.
[ ] Set up dual depreciation schedules for carryover and excess basis.
[ ] Retain permanently: intermediary engagement and disqualification analysis; exchange agreement; assignments and notices; escrow instructions showing non-receipt; signed identification with proof of delivery; boot computation; basis computation; business purpose memorandum.
[ ] Retain the same file for reverse and improvement exchanges, plus the accommodation arrangement and construction records.
[ ] For opportunity zone investments, retain the gain documentation, the 180-day computation, fund certifications, asset test records, substantial improvement records, and the written working capital plan.
[ ] Note that the embedded gain and recapture will be questioned on a sale many years later, and this file is the only record of why the basis number is what it is.

Failure screen

[ ] Did a disqualified person serve as intermediary? No cure.
[ ] Did proceeds pass through the client's or counsel's account? No cure.
[ ] Was identification late, unsigned, ambiguous, or misdelivered? No cure.
[ ] Was only one property identified? Fully taxable if it fails.
[ ] Did the client trade down in value or debt? Recognized gain without cash.
[ ] Is an improvement schedule past day 180? Only completed improvements count.
[ ] Were partnership mechanics addressed months in advance?
[ ] Will a related party dispose within two years?
[ ] Was installment recapture modeled against the down payment?
[ ] Does the zone fund have a written working capital plan and passing asset tests?
[ ] Was a condemnation or casualty treated as a loss when it produced gain?
[ ] Is there a contemporaneous business purpose memorandum? Commissioner v. Court Holding Co., Knetsch v. United States, Higgins v. Smith, and Moline Properties, Inc. v. Commissioner are all available to the government without one.

Structure selection screen

Run this before recommending anything.

Question	If yes
Is the gain from real property held for business or investment?	26 U.S.C. § 1031 exchange is available
Is the gain a capital gain from any other source?	Opportunity zone investment is the only deferral route
Will the client be financing the buyer?	26 U.S.C. § 453 installment reporting applies automatically
Did a fire, theft, or condemnation produce the proceeds?	26 U.S.C. § 1033 applies and a replacement clock is running
Can the client be kept entirely away from the proceeds?	Required for exchange; not required for zone
Will the client hold the replacement until death?	26 U.S.C. § 1014 step-up converts deferral into elimination
Will the client sell for cash within a few years?	Model whether deferral exceeds transaction costs and deadline risk
Is the property held by a partnership with divergent partner goals?	Restructure months ahead under 26 U.S.C. § 721, 26 U.S.C. § 704, 26 U.S.C. § 706
Is a residence conversion contemplated?	26 U.S.C. § 121 holding requirement and depreciation exclusion apply
Is the counterparty related?	Two-year disposition rule applies

Boot worksheet

Line	Relinquished	Replacement
Contract value
Less selling costs		—
Mortgage payoff / new mortgage
Equity
Cash contributed by taxpayer	—
Cash received by taxpayer		—
Debt relief (old − new, if positive)		—
Debt assumed (new − old, if positive)	—
Net boot
Realized gain
Recognized gain = lesser of the two

Delivery rule. Give this to the client in writing before the replacement closing. Debt-relief boot is the single most common unpleasant surprise in exchange practice.

Deadline card

Fill in at the relinquished closing and send to the client the same day.

Relinquished property closed: ______
Day 45 (identification deadline): ______
Day 180 (exchange deadline): ______
Return due date including extensions: ______
Controlling deadline is the earlier of day 180 and the return due date: ______
Intermediary contact: ______
Identification must be written, signed, and delivered to: ______

No extensions exist absent declared disaster relief. Do not let a client believe otherwise.

Structuring a Like-Kind Exchange or an Opportunity Zone Investment: A Practical Checklist

How to use this checklist

Track A, Step 1: Before the property is listed

Track A, Step 2: The contract

Track A, Step 3: Closing on the relinquished property

Track A, Step 4: Identification (days 1–45)

Track A, Step 5: Boot computation (before the replacement closing)

Track A, Step 6: Replacement closing and basis

Track A, Step 7: Variations

Track B: Opportunity zone investment

Track C: Installment sale

Track D: Involuntary conversion

Track E: Reporting and permanent records

Failure screen

Structure selection screen

Boot worksheet

Deadline card

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