Section 1031 provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment, with the restriction that the properties being exchanged must not fall into one of the exclusions set forth in I.R.C. 1031(a)(2). Additionally, Sec. 1031 requires that the taxpayer that relinquishes the property must be the same taxpayer that receives the replacement property.This commonly causes concern for taxpayers who wish to or are required to acquire their replacement property in a single member LLC, or "special purpose entity". The concern is unnecessary however, as the IRS has approved the use of disregarded single-member LLCs for purposes of receiving replacement property in a like-kind exchange. The IRS has ruled that where a taxpayer relinquishes property and forms or uses an existing disregarded single-member LLC for purposes of receiving replacement property, the assets of the disregarded LLC are treated as the assets of the taxpayer. Accordingly, the taxpayer would qualify as both the transferor of the relinquished property and the transferee of the replacement property for purposes of a like-kind exchange; see Private Letter Ruling 97-52-012 (Sept. 15, 1997); Private Letter Ruling 98-0-7-013 (Nov. 1997); Private Letter Ruling 1999-11-033 (Dec. 1998).

Exchangors are also commonly concerned where the community property characterization on the relinquished and the replacement property is not the same (ie. the client is selling a property titled as sole and separate property, and wishes to acquire the replacement property as a community property, so that in theory the vesting requirement would not be met). The IRS has however provided guidance regarding the classification of an entity that is wholly owned by a husband and wife as community property. In Revenue Procedure 2002-69, the Service held that spouses owning qualified entities as community property may to treat the entity as either disregarded or as a partnership for purposes of the "check-the-box regulations", provided the entity has not otherwise made an election to be taxed as a corporation; the treatment of a qualified entity as either a partnership or a disregarded entity can also be changed at the election of the spouses. Any change in reporting position by spouses owning a qualified entity will be treated by the IRS as a conversion of the entity.
In addition, in Private Letter Ruling 2003-39, the Service concluded that a disregarded LLC wholly owned by spouses as community property continued to be disregarded after the transfer of the LLC to a revocable trust created by the spouses.