12-1 ©2011 pearson education, inc. publishing as prentice hall
TRANSCRIPT
12-1©2011 Pearson Education, Inc. Publishing as Prentice Hall
12-2
PROPERTY TRANSACTIONS:
NONTAXABLE EXCHANGES
Like-kind exchangesInvoluntary conversionsSale of principal residenceTax planning considerationsCompliance and procedural
considerations
©2011 Pearson Education, Inc. Publishing as Prentice Hall
12-3
Like-Kind Exchanges(1 of 2)
Like-kind property definedA direct exchange must occurThree-party exchangesReceipt of bootBasis of property received
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12-4
Like-Kind Exchanges(2 of 2)
Exchanges between related parties
Transfer of non-like-kind property
Holding period for property received
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12-5
Like-kind Property Defined(1 of 2)
Refers to nature and characterNot grade or quality
Location of propertyU.S. and non-U.S. real property
not like-kind propertyPersonal property used in U.S.
same property used outside U.S. not like kind
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Like-kind Property Defined(2 of 2)
Property of like classAny real property for any real
property Personal property for personal
property w/in same General Asset Class
Non-like-kind propertyInventory and securities
Limited exceptions under §1036©2011 Pearson Education, Inc. Publishing as Prentice Hall
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A Direct Exchange Must Occur
Sale and subsequent purchase does not qualify unless both transactions interdependent
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Three-Party Exchanges
One taxpayer may not want to sell property to avoid gain recognitionE.g., buyer purchases suitable like-
kind property, then swap like-kind properties
Nonsimultaneous exchangeReplacement property must be
identified w/in 45 days and received w/in 180 days
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12-9
Receipt of Boot(1 of 2)
When like-kind properties not equal value, one or both parties may give/receive non-like-kind property
Non-like-kind property is called bootReceiving boot triggers gain
recognitionGain lesser of gain realized or boot
receivedDoes not trigger loss recognition
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Receipt of Boot(2 of 2)
Property transfer involving liabilitiesLiability transferred by taxpayer
treated as receiving cashTaxpayer assuming liability treated as
paying cashBoth taxpayers transferring
liabilitiesLiabilities offset to determine if there
is net boot©2011 Pearson Education, Inc. Publishing as Prentice
Hall
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Basis of Property Received(1 of 2)
Computing basis on like-kind property
Basis in all property given up+ Gain recognized- Loss recognized- Boot received
Basis in like-kind property received©2011 Pearson Education, Inc. Publishing as Prentice
Hall
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Basis of Property Received(2 of 2)
Alternate computation FMV of like-kind property received
- Deferred gain+ Deferred loss
Basis in like-kind property received
Basis of non-qualifying property (boot) is property’s FMV
©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Exchanges between Related Parties
Cannot qualify for like-kind treatment if either party disposes of qualified property w/in 2 yearsDeferred gain would be
recognized in year of dispositionDispositions due to death,
involuntary conversion, or other non-tax avoidance purposes disregarded
©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Transfer of Non-like-kind Property
Gain or loss on non-like-kind propertyFMV – Adjusted Basis
Loss on personal use asset not recognized
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Holding Period for Property Received
Holding period for like-kind property received includes holding period of like-kind property given upIf like-kind property is §1231 asset
or capital assetHolding period for boot
Begins on day after property received©2011 Pearson Education, Inc. Publishing as Prentice
Hall
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Involuntary Conversions
Involuntary conversion definedTax Treatment of Gain due to
involuntary conversion into bootReplacement propertyTime requirements for
replacement
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Involuntary Conversion Defined
(1 of 2)
Includes theft, seizure, requisition, condemnation, or sudden destruction of property
Threat of condemnationReasonable to believe property
will be condemnedConversion must be involuntary
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Involuntary Conversion Defined
(2 of 2)
Gains arise when insurance or government proceeds exceed property’s adjusted basis
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Treatment of Involuntary Conversion Gain Due to Boot
(1 of 2)
Realized gainAmount received (realized) less
basis in property convertedRecognized gain
Gain deferral achieved by purchasing replacement property ≥ amount realized
Gain recognizedAmount realized – cost of replacement
prop.©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Treatment of Involuntary Conversion Gain Due to Boot
(2 of 2)
Basis of replacement propertyCost – deferred gainCarryover of holding period from
old propertySeverance damages
Considered part of amount realized from condemnation
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Replacement Property(1 of 2)
Functional use testMore restrictive than like-kind testE.g., farmland for unimproved
land would not meet functional use test
ExceptionReal property condemned only need
meet like-kind test
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Replacement Property(2 of 2)
Taxpayer-use testApplies to rental property owned
by an investorOnly requirement is that owner-
investor must lease property
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Time Requirements forReplacement
Normal replacement period 2 years after end of first taxable yearReal property held for use in trade
or business or investment can be replaced w/in 3 years after end of tax year
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Sale of Principal Residence
§121 exclusionPrincipal residence definedSale of more than one principal
residence within a two-year period
Nonqualified use after 2008Involuntary conversion of a
principal residence©2011 Pearson Education, Inc. Publishing as Prentice Hall
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§121 Exclusion
Taxpayer may exclude up to $250K ($500K if MFJ) on gain from sale of principal residenceMust own and occupy as principal
residence for two of last five years AND
Not claimed exclusion w/in 2 yrs of sale
Non-excluded gain is capital gainLoss is personal and nondeductible
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Principal Residence Defined
Taxpayer has only one principal residenceE.g., condo, houseboat, or house
trailerIf taxpayer owns multiple
residences, use facts and circumstances test to determine principal residenceIncludes time spent at each
residence
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Sale of More than One Principal Residence within a
2-year Period
Exception to disallowance of exclusion if sold w/in 2-year periodOwnership and use test must be
metAvailable if sale occurred due to
change in employment, health, or unforeseen circumstances
Prorate exclusion based days owned divided by 730 days (731 if leap year) if all other tests have been met
©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Nonqualified Use After 2008
HSTA of 2008 reduces advantage of converting rental/vacation home into principal residenceGain from nonqualified is taxable
Nonqualified use is any non-principal residence use after 12/31/2008
Gain allocated to nonqualified use based on
[period of nonqualified use]/[total time owned]©2011 Pearson Education, Inc. Publishing as Prentice
Hall
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Involuntary Conversion of a Principal Residence
Gain may be deferred under involuntary conversion or principal residence rulesInvoluntary conversion treated as
a sale for purposes of §121 exclusion rules
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Tax Planning Considerations
(1 of 2)
Avoiding like-kind exchange provisionsIf taxpayer has capital loss to offset
capital gain or Like-kind property will have realized
loss
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Tax Planning Considerations
(2 of 2)
Sale of a principal residencePortion of residence used for
business not eligible for §121 exclusionIf business portion is a separate
structure treat as two separate salesIf not separate structure gain due to
depreciation not eligible for exclusion
©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Compliance and Procedural
Considerations
Reporting involuntary conversionsMust file amended return if defer
gain, but do not replace property w/in time frame
Reporting sale or exchange of principal residenceGain not excluded reported on
Schedule D©2011 Pearson Education, Inc. Publishing as Prentice Hall
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12-33©2011 Pearson Education, Inc. Publishing as Prentice Hall