Comparative Perspectives

This chapter examines three common-law systems, the United Kingdom, Ireland, and Canada, and two civil-law systems, Germany and Japan. The descriptions are of the statutes and official guidance as they stood when checked for this treatise. Foreign law changes, and nothing here is advice on foreign tax.

65.1 Rollover relief in other common-law systems

The United Kingdom. The UK's roll-over relief, in section 152 of the Taxation of Chargeable Gains Act 1992, is available to a person carrying on a trade. The old assets must have been used, and used only, for the purposes of the trade throughout the period of ownership. The consideration must be applied in acquiring new assets that are taken into use, and used only, for the trade. Both the old and the new assets must fall within the classes listed in section 155.¹ The classes begin with buildings and land occupied, as well as used, only for the purposes of the trade, and fixed plant or machinery, and they extend to ships, aircraft, goodwill, and several kinds of quota.²

The relief must be claimed. On a claim, the disposal of the old assets is treated as producing neither gain nor loss, and the cost of the new assets is reduced by the gain, so the gain is carried into the new assets much as section 1031(d) carries it into replacement property. The new assets must be acquired, or an unconditional contract for their acquisition entered into, within a window beginning 12 months before and ending 3 years after the disposal, unless the tax authority allows an earlier or later time, and the relief may be applied provisionally while an unconditional contract is pending.³

Two refinements matter for comparison. If only part of the proceeds is reinvested, relief is available only when the part not reinvested is less than the gain, and the gain is then reduced to that part, a rule that works much like boot.⁴ If the new asset is a depreciating asset, the gain is not carried into its cost. It is held over instead and becomes chargeable when the new asset is disposed of, when it ceases to be used in the trade, or ten years after its acquisition, whichever comes first.⁵

Trade use and the end of the holiday lettings route. The UK relief is built around a trade. A property letting business came within it only through special rules that applied capital gains rules to furnished holiday lettings as if they were a trade. Those rules ceased to apply from April 6, 2025, for capital gains tax, and April 1, 2025, for corporation tax. Roll-over relief is no longer available where a replacement asset is acquired on or after that date for a holiday lettings business, although a gain on a holiday lettings asset disposed of before that date may still be rolled into an asset used in an actual trade.⁶ A UK owner who sells rental property and buys other rental property therefore has no general counterpart to section 1031.

Ireland. Ireland's version, section 597 of the Taxes Consolidation Act 1997, followed the same design. A person carrying on a trade could defer gain on the disposal of plant or machinery, land and buildings used only for the trade, goodwill, and certain financial assets of sporting bodies, by reinvesting in new assets used exclusively in the trade within a period from one year before to three years after the disposal. The relief had to be claimed, and a partial reinvestment produced only partial deferral. Ireland ended the relief for gains on disposals on or after December 4, 2002. Gains rolled over before that date may continue to be rolled over while the person keeps reinvesting.⁷ Among the systems examined here, Ireland is the one that withdrew its general rollover relief.

Canada. Canada's Income Tax Act provides an elective replacement property rule in section 44. It applies to two kinds of disposition. The first is involuntary: property unlawfully taken, destroyed, or taken under statutory authority, for which compensation is received. The second is voluntary, but only for a former business property.⁸ A former business property is real property, or an interest in it, used by the taxpayer or a related person primarily to earn income from a business, and the definition expressly excludes rental property, the land under it, associated parking areas, driveways, and yards, and leasehold interests in any of them.⁹ For a voluntary disposition, the replacement must be acquired before the later of the end of the first taxation year after the year of disposition and 12 months after the end of that year. For an involuntary disposition the period runs to the later of the end of the second following taxation year and 24 months after the end of the year of disposition. The taxpayer elects in the return for the year in which the replacement is acquired.¹⁰ The replacement must have been acquired to replace the former property and used for the same or a similar use, and where the former property was used in a business, it must be used in the same or a similar business.¹¹

What the common-law systems share. All three tie reinvestment relief to business use. Two of them, the UK through its trade requirement and Canada through its express exclusion of rental property, deny relief to the passive real estate investor whom section 1031 covers expressly by extending to property held for investment. All three allow a sale followed by a separate purchase, so none needs an intermediary. The UK and Irish windows run backward as well as forward, which makes acquiring the replacement first unremarkable. Each uses a similarity requirement, whether defined classes of assets or same or similar use, instead of like kind.

65.2 Civil-law approaches to reinvestment relief

Germany. Section 6b of Germany's Income Tax Act, the Einkommensteuergesetz, allows a taxpayer who sells land, agricultural or forestry growth together with its land, buildings, or inland ships to deduct the gain from the cost of qualifying replacement assets acquired or produced in the year of sale or the preceding year.¹² The permitted directions are fixed by statute. Gain on land may be applied to land, to such growth, or to buildings; gain on buildings may be applied only to buildings; and gain on inland ships only to inland ships.¹³ The gain is the excess of the sale price, net of selling costs, over the asset's book value.¹⁴

When no replacement has yet been acquired, the taxpayer may instead form a reserve that reduces profit in the year of sale. The reserve is applied against replacement assets acquired or produced in the following four years, a period extended to six years for a newly constructed building whose construction began before the end of the fourth year, and a reserve still in existence at the end of the fourth year is dissolved into income except to the extent a deduction from the cost of such a building remains possible.¹⁵ If a reserve is dissolved without a corresponding reinvestment, profit is increased by 6 percent of the dissolved amount for each full year the reserve existed.¹⁶

The conditions are demanding. The taxpayer must determine profit by balance sheet accounting. The asset sold must have belonged without interruption for at least six years to the fixed assets of a domestic permanent establishment, and the replacement must belong to the fixed assets of a domestic permanent establishment. The gain must not be excluded from taxable domestic profit, and the deduction and the reserve must be traceable in the accounts.¹⁷ Where the replacement is business property in another member state of the European Union or the European Economic Area, the statute does not defer the tax but allows it, on application, to be paid in five equal annual installments.¹⁸ A separate rule lets taxpayers other than corporations roll up to 2,000,000 euros of gain on shares in corporations into new shares or depreciable movable assets acquired within two years, or into buildings acquired or produced within four years.¹⁹

The German design differs from section 1031 in four ways that matter. It reaches only business assets, because it depends on balance sheet accounting and a domestic permanent establishment. It requires six years of prior ownership, where section 1031 has no minimum holding period. It works through book value, so the rolled gain reduces the depreciable cost of the replacement, much as an exchanged basis does. And it prices failure: the reserve is a four-year window with a 6 percent annual charge if it goes unused.

Japan: an exchange rule. Japan has the closest analog to section 1031 among the systems examined here, and it has two relevant provisions. Article 58 of the Income Tax Act treats an individual's exchange of a fixed asset for a fixed asset of the same kind as if no transfer had occurred.²⁰ The requirements are strict. Both assets must be fixed assets, so land held for sale by a real estate dealer does not qualify. They must be of the same kind: land for land, with leasehold rights counted as land, and buildings for buildings, with attached equipment and structures counted as buildings. The asset given up must have been held for at least one year, and the asset received must have been held by the other party for at least one year and must not have been acquired for the purpose of the exchange. The asset received must be put to the same use the asset given up had immediately before the exchange, under statutory categories such as residential land, farmland, and forest for land, and residential, store or office, factory, and warehouse for buildings. The difference in value between the two assets must be within 20 percent of the higher value. Cash received to equalize the exchange is taxable, and the relief must be claimed on a return with prescribed documents.²¹

Two of those requirements would end the American deferred exchange as it is practiced. A replacement asset acquired by the other party for the purpose of the exchange does not qualify, which excludes arrangements in which a party acquires property in order to deliver it, and the same use and 20 percent value requirements confine the rule to near substitutes.

Japan: partial deferral for specified business replacements. Article 37 of the Act on Special Measures Concerning Taxation takes a different approach to business property that is sold and replaced. When an individual sells specified business assets and acquires specified replacement assets within the prescribed period, part of the gain is deferred. Where the replacement costs more than the sale price, the amount realized is generally computed as 20 percent of the sale price, so that most of the gain is deferred, and the replacement takes over the acquisition cost of the asset sold for purposes of later gain and depreciation.²² The relief is limited to combinations the statute specifies: property in aircraft noise areas replaced with property outside them; property in built-up areas replaced with buildings acquired in urban redevelopment projects; land, buildings, or structures in Japan held for more than ten years replaced with land of at least 300 square meters used for offices, factories, stores, housing, or similar facilities, or with buildings or structures used for such facilities, for transfers through March 31, 2029; and certain ships.²³ The replacement generally must be acquired in the year of sale, the preceding year, or the following year, with notices filed on a prescribed schedule, and put into business use within one year, and replacement land qualifies only up to five times the area of the land sold.²⁴

What the civil-law systems show. Both civil-law systems separate two ideas that section 1031 combines. Germany and Japan's article 37 permit a sale and a later purchase, but they confine relief to business assets, specified directions or combinations of reinvestment, and time limits, and article 37 defers only part of the gain. Japan's article 58 comes closest to like kind, but it requires a true exchange between owners of long-held, same-use assets of similar value. Neither system extends full deferral to an investor who sells one property through an intermediary and buys another property of any kind of real estate.

65.3 Lessons for design

Scope follows purpose. Every foreign relief examined here rests on continuity of a business, and each limits itself accordingly. Section 1031's extension to property held for investment is the feature that most sets it apart.²⁵ It is also the reason the provision serves passive real estate investors whom none of the foreign rules described in this chapter would reach. A reform modeled on those systems would not need to repeal section 1031 to change it fundamentally; it would need only to remove the words "or for investment."

The relationship test is a policy lever. Like kind, as applied to real property, treats almost any real estate as a substitute for any other. The foreign systems use narrower tests: statutory classes in the United Kingdom, same or similar use in Canada, fixed directions of reinvestment in Germany, and same kind, same use, and similar value in Japan's exchange rule.²⁶ The Senate Finance staff's 2013 question whether like kind should give way to a similar use standard (64.3) had working models abroad.²⁷

Intermediaries are an artifact of the word exchange. The United Kingdom, Ireland, Canada, Germany, and Japan's article 37 all permit a sale followed by a separate purchase. None of them needs a qualified intermediary, a safe harbor for exchange funds, or rules to police them. The American industry described in Chapter 55 exists because section 1031 requires an exchange and the regulations built the deferred exchange around that requirement.²⁸ A rollover design would remove the need for intermediaries, and with it the fraud and insolvency risks discussed in Chapters 51 and 55. It would also remove the discipline that keeping sale proceeds out of the taxpayer's hands now imposes.

Time is traded for scope. The foreign systems allow long windows: three years forward and one year back in the United Kingdom and Ireland, roughly one to two years after the year of disposition in Canada, and up to four years, or six for new buildings, in Germany. Section 1031 allows 45 days to identify replacement property and 180 days to complete the exchange, with acquisition of replacement property first available only through a safe harbor.²⁹ The United States pairs broad scope with a short clock; the others pair narrow scope with a long one. The price premium studies in 63.3 suggest that the short clock has a cost, and that exchangers bear at least part of it.

Partial and temporary deferral have working models. Three foreign features speak directly to the reform families in Chapter 64. Japan's article 37 defers most but not all of the gain, a proportional alternative to a dollar cap. The UK's rule for depreciating assets holds gain over for no more than ten years, a time limit that section 1031 has never had. Germany's 6 percent annual charge on unused reserves shows that an interest-like charge can be administered, at least when it applies only to failed reinvestment.³⁰

Relief can be withdrawn prospectively. Ireland ended its general rollover relief in 2002, and the United Kingdom withdrew the holiday lettings route to rollover relief in 2025 while keeping the relief for trades. Both changes applied prospectively and preserved relief for gains already rolled over or disposals already made.³¹ They show that reinvestment relief, once granted, can be narrowed or withdrawn with conventional transition rules, the same questions Chapter 64 identifies for repeal in the United States.

The mechanism is common to all. Every system examined carries the deferred gain into the replacement, by reducing its cost, its book value, or the acquisition cost it takes over. The systems disagree about who receives deferral, for what property, for how long, and at what price, not about how deferral works. That is also where the American debate lies.