If the exchange involves only the like-kind property, and no money or other unlike property is involved, the exchange is nontaxable and the basis of the property received is generally the same as the basis of the property given. Any gain or loss on the exchange would not be recognized until you sell or dispose of the property you receive.
If you pay money or give up other, different property in a like-kind exchange, no gain or loss is recognized on the exchange, but your basis in the new property is your basis in the like-kind property you give up plus the money you pay and the value of the other property you give.
In order for an exchange to be nontaxable, the properties given and received in the exchange have to meet two tests: they have to be qualifying property, and they have to be like-kind property.
Qualifying Property
Qualifying property is property used for productive use in a trade or business, or for investment purposes. It could include land, buildings, machinery and vehicles. But property that is held for sale in a trade or business, including stock in trade, inventory, merchandise, and real estate held by dealers, does not qualify for nontaxable exchanges. Also, stocks, bonds or other securities held for investment do not qualify for like-kind nontaxable exchanges.
Personal property, such as your automobile and your home, do not normally qualify for nontaxable exchanges.
Like-Kind Property
Also, the property must be like-kind; that is, the property you give and receive in the exchange must be similar in nature or character, and generally used for the same purpose. The fact that the properties are different in terms of their grade or quality does not disqualify them as like-kind property.