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Partially Nontaxable Exchanges: Business Property Sales (2025 IRS Guide)

This guide covers “Partially Nontaxable Exchanges” within business property sales. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 544 (2025), Sales and Other Dispositions of Assets, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

Generally, if you exchange real property you hold for use in a trade or business or hold for investment solely for other like-kind real property held for use in a trade or business or investment, you do not recognize the gain or loss from the exchange. However, if you 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. See Qualifying Property, later, for details on property that qualifies and for exceptions.

The exchange of property for the same kind of property is the most common type of nontaxable exchange. To be a like-kind exchange, the property given up (relinquished property) and the property received (replacement property) must be both of the following.

  • Qualifying property.

  • Like-kind property.

Additional requirements apply to exchanges in which the property received as like-kind property is not received immediately upon the transfer of the property given up. See Deferred Exchange, later.

If the like-kind exchange involves the receipt of money or unlike property or the assumption of your liabilities, see Partially Nontaxable Exchanges, later.

If the like-kind exchange involves a portion of a MACRS asset and gain is not recognized in whole or in part, the partial disposition rules in Regulations section 1.168(i)-8 apply. See Partial Dispositions of MACRS Property, earlier.

Partially Nontaxable Exchanges

In a like-kind exchange in which you realize a gain, if in addition to receiving like-kind property, you also receive money or non-like-kind property, you may have a partially nontaxable exchange. If you realize a gain on the exchange, you must recognize the gain you realize (see Amount recognized, earlier) to the extent of the money and the FMV of the non-like-kind property you receive in the exchange. If you realize a loss on the exchange, no loss is recognized. However, see Non-like-kind property given up, later.

The gain recognized (taxable amount) on the disposition of the like-kind property you give up is the smaller of the following amounts.

  1. The amount of gain realized. See Gain or Loss From Sales and Exchanges, earlier.

  2. The limit of recognized gain. To figure the limit on recognized gain, add the money you received and the FMV of any non-like-kind property you received. Reduce this amount (but not below zero) by any exchange expenses (closing costs) you paid. Compare that amount to your gain realized.

Example.

You exchange real estate held for investment with an FMV of $110,000 and an adjusted basis of $80,000 for other real estate you now hold for investment. The FMV of the real estate you received was $100,000. You also received $10,000 in cash. You paid $5,000 in exchange expenses.

FMV of like-kind property received $100,000
Add: Cash received 10,000
Total received $110,000
Minus: Exchange expenses paid (5,000)
Amount realized $105,000
Minus: Adjusted basis of property you transferred (80,000)
Realized gain $25,000


Although the total gain realized on the transaction is $25,000, the recognized (taxable) gain is only $5,000, figured as follows.

Money received (cash) $10,000
Minus: Exchange expenses paid (5,000)
Recognized gain $5,000

Assumption of liabilities.

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 purposes of figuring the limit of recognized gain, if the other party to a nontaxable exchange assumes any of your liabilities, you will be treated as if you received money in the amount of the liability. You can decrease (but not below zero) the amount of money you are treated as receiving by the amount of the other party’s liabilities that you assume and by any cash you pay or the FMV of non-like-kind property you give up. For more information on the assumption of liabilities, see section 357(d) of the Internal Revenue Code. For more information on the treatment of the assumption of liabilities in a sale or exchange, see Regulations section 1.1031(d)-2.

Example.

The facts are the same as in the previous example, except the property you gave up was subject to a $30,000 mortgage for which you were personally liable. The other party in the trade agreed to assume the mortgage. Figure the gain realized as follows.

FMV of like-kind property received $100,000
Cash 10,000
Mortgage assumed by other party 30,000
Total received $140,000
Minus: Exchange expenses (5,000)
Amount realized $135,000
Minus: Adjusted basis of property you transferred (80,000)
Realized gain $55,000


The realized gain is recognized (taxable) gain only up to $35,000, figured as follows.

Money received (cash) $10,000
Money received (liability assumed by other party) 30,000
Total money and unlike property received $40,000
Minus: Exchange expenses paid (5,000)
Recognized gain $35,000

Example.

The facts are the same as in the previous example, except the property you received had an FMV of $140,000 and was subject to a $40,000 mortgage that you assumed. Figure the gain realized as follows.

FMV of like-kind property received $140,000
Cash 10,000
Mortgage assumed by other party 30,000
Total received $180,000
Minus: Exchange expenses (5,000)
Amount realized $175,000
Minus: Adjusted basis of property you transferred (80,000)
Minus: Mortgage you assumed (40,000)
Realized gain $55,000


The realized gain is recognized (taxable) gain only up to $5,000, figured as follows.

Money received (cash) $10,000
Money received (net liabilities assumed by other party):
Mortgage assumed by other party $30,000
Minus: Mortgage you assumed (40,000)
Total (not below zero) $0
Total money and unlike property received $10,000
Minus: Exchange expenses paid (5,000)
Recognized gain $5,000

Non-like-kind property given up.

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

Example.

You exchange stock and real estate you held for investment for real estate you also intend to hold for investment. The stock you transfer has an FMV of $1,000 and an adjusted basis of $4,000. The real estate you exchange has an FMV of $19,000 and an adjusted basis of $15,000. The real estate you receive has an FMV of $20,000. Your realized gain on the exchange is $4,000, the FMV of the real estate received ($20,000) less the sum of the adjusted basis of the real estate given up ($15,000) and the FMV of the stock you transferred ($1,000). You do not recognize gain on the exchange of the real estate because it qualifies as a nontaxable exchange. However, you must recognize (report on your return) a $3,000 loss on the stock because it is non-like-kind property.

Non-like-kind property received.

If, in addition to like-kind property, you receive non-like-kind property, you must recognize gain on the non-like-kind property you receive.

Example.

You exchange real estate you held for investment for real estate you intend to hold for investment. The real estate you exchange has an FMV of $20,000 and an adjusted basis of $16,000. You receive real estate with an FMV of $18,000 and other non-like-kind property with an FMV of $2,000. The amount of gain realized on the exchange is $4,000. The amount of gain recognized is limited to the lesser of the realized gain or the FMV of other non-like-kind property received, or $2,000 calculated as follows

FMV of like-kind property received $18,000
Add: FMV of non-like-kind property received 2,000
Total $20,000
Less: Adjusted basis of property given up (16,000)
Realized gain $4,000
Recognized gain $2,000

Basis of property received.

The total basis for all properties (other than money) you receive in a partially nontaxable exchange is the total adjusted basis of the properties you give up, with the following adjustments.

  1. Add both of the following amounts.

    1. Any additional costs you incur.

    2. Any liabilities you assumed on the like-kind property received, and

    3. Any gain you recognize on the exchange.

  2. Subtract both of the following amounts.

    1. Any money and the FMV of any non-like-kind property you receive.

    2. Any liabilities assumed by the other party on the like-kind property given up, and

    3. Any loss you recognize on the exchange on non-like-kind property given up.

This basis is first allocated to the non-like-kind property received, other than money, up to its FMV on the date of the exchange. The rest is allocated to the basis of the like-kind property.

For more information on basis, see Pub. 551.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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