BA 128A1 329

1
BA 128A-1 3/29

• Questions from lecture
• Review Chapter 12
• Assignment I12-28,29,40,43
• Additional assignment I2-26,42,46

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Nontaxable Exchanges for property transactions

• Three types
• Like-kind exchanges
• Involuntary conversions
• Sales of a personal residence

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Like-kind exchange

• Only applied to assets held for
• production or use in trade/business
• investment purposes
• Non recognition of gain or loss is mandatory if
  qualified
• like-kind - real property vs. real property, real
  property outside US ltgt real property in the US,
  personal property - within same general asset
  class e.g. furniture and fixtures, automobiles.
  (like-classes) Each property can only have 1
  general asset class
• What does not have like classes - intangible
  personal property, non depreciable personal
  property or personal property held for
  investments
• direct exchange
• What is not like-kind
• securities or inventory
• except common stock of same corporation -
  preferred vs. common stock of same corporation
  not like-kind
• personal use assets

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Like-kind exchange (cont)

• Non-simultaneous exchange - OK if completed
  within a specified time period (exchange
  identified within 45 days and property received
  the earlier of 180 dyas after property is
  transferred or the due date for filing a return
• Realized vs. recognized
• Boot received - gain is recognized to the extent
  the boot is received but not greater than the
  amount realized
• Liabilities assumed by purchased party is
  considered cash received by taxpayer. If both
  parties assumed liabilities, the difference
  between liabilities assumed is the boot
• Basis of property Basis of property exchanged -
  boot received gain recognized - loss recognized
• Related party transactions- 2 year rule
• Non like-kind property - recognized difference
  between FMV and adjusted basis
• Holding period - capital asset - use exchanged
  propertys holding period, boot property - date
  of exchange

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Involuntary conversions

• Election basis, applies only to gains - deferral,
  not losses
• Basis of replacement property propertys cost
  reduced by amount of gain deferred
• Definition- theft,seizure,condemnation,
  destruction
• Replacement period - from date of involuntary
  conversion to 2 years after the end of the tax
  year when the gain is realized for condemnation
  - 3 years
• If replacement property cost lt amount realized,
  gain must be recognized
• holding period replaced property holding period

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Involuntary conversions

• Severance damages - compensation for decline in
  value, analogous to proceeds of property
  insurance, amount received reduces basis of
  property
• Replacement property - similar or related in
  service. Use functional test except taxpayer use
  test for own and leased property and like-kind
  property for condemnation of business/trade/invest
  ment property

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Sale of principal residence

• Exclusion of gain. 250,000 for single, 500,000
  for married filing jointly
• Determined on individuals basis
• One exclusion every two years
• exception - part of the gain may be excluded if
  sale/exchange is due to a change of employment,
  health or unforeseen circumstances, see e.g.
  I2-59
• Principal residence - use most of the time
• Selling expenses increase adjusted basis
• Involuntary conversion treated as sale, exclusion
  rule and deferral rule both apply, functional
  test used for replacement property
• Presidential Declared Disaster after 8/31/91,
  gain from receipt of insurance proceeds is
  excluded

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Tax planning considerations

• Nontaxable like-kind exchange
• need to offset capital loss with capital gain
• deferred gain reduced basis, no depreciation
  recognized
• Almost always want to use the sale of principal
  residence to exclude gain
• Election to defer gain for involuntary conversion
  - tax rate and capital loss offset,
  non-recognition is mandatory if property is
  directly converted into similar property