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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-4

Like-Kind Exchanges(2 of 2)

Exchanges between related parties

Transfer of non-like-kind property

Holding period for property received

©2011 Pearson Education, Inc. Publishing as Prentice Hall

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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-6

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

12-7

A Direct Exchange Must Occur

Sale and subsequent purchase does not qualify unless both transactions interdependent

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-8

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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-10

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

12-11

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

12-12

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

12-13

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

12-14

Transfer of Non-like-kind Property

Gain or loss on non-like-kind propertyFMV – Adjusted Basis

Loss on personal use asset not recognized

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-15

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

12-16

Involuntary Conversions

Involuntary conversion definedTax Treatment of Gain due to

involuntary conversion into bootReplacement propertyTime requirements for

replacement

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-17

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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-18

Involuntary Conversion Defined

(2 of 2)

Gains arise when insurance or government proceeds exceed property’s adjusted basis

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-19

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

12-20

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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-21

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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-22

Replacement Property(2 of 2)

Taxpayer-use testApplies to rental property owned

by an investorOnly requirement is that owner-

investor must lease property

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-23

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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-24

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

12-25

§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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-26

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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-27

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

12-28

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

12-29

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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-30

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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

12-31

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

12-32

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

Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark at University of Northern Colorado’s

Kenneth W. Monfort College of Businessrichard.newmark@PhDuh.com

12-33©2011 Pearson Education, Inc. Publishing as Prentice Hall