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12-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall.

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Presentation on theme: "12-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall."— Presentation transcript:

1 12-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2 12-2 PROPERTY TRANSACTIONS: NONTAXABLE EXCHANGES Like-kind exchanges Involuntary conversions Sale of principal residence Tax planning considerations Compliance and procedural considerations ©2011 Pearson Education, Inc. Publishing as Prentice Hall

3 12-3 Like-Kind Exchanges (1 of 2) Like-kind property defined A direct exchange must occur Three-party exchanges Receipt of boot Basis of property received ©2011 Pearson Education, Inc. Publishing as Prentice Hall

4 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

5 12-5 Like-kind Property Defined (1 of 2) Refers to nature and character Not grade or quality Location of property U.S. and non-U.S. real property not like-kind property Personal property used in U.S. same property used outside U.S. not like kind ©2011 Pearson Education, Inc. Publishing as Prentice Hall

6 12-6 Like-kind Property Defined (2 of 2) Property of like class Any real property for any real property Personal property for personal property w/in same General Asset Class Non-like-kind property Inventory and securities Limited exceptions under §1036 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

7 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

8 12-8 Three-Party Exchanges One taxpayer may not want to sell property to avoid gain recognition E.g., buyer purchases suitable like-kind property, then swap like-kind properties Nonsimultaneous exchange Replacement property must be identified w/in 45 days and received w/in 180 days ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9 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 boot Receiving boot triggers gain recognition Gain lesser of gain realized or boot received Does not trigger loss recognition ©2011 Pearson Education, Inc. Publishing as Prentice Hall

10 12-10 Receipt of Boot (2 of 2) Property transfer involving liabilities Liability transferred by taxpayer treated as receiving cash Taxpayer assuming liability treated as paying cash Both taxpayers transferring liabilities Liabilities offset to determine if there is net boot ©2011 Pearson Education, Inc. Publishing as Prentice Hall

11 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 12-12 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 propertys FMV ©2011 Pearson Education, Inc. Publishing as Prentice Hall

13 12-13 Exchanges between Related Parties Cannot qualify for like-kind treatment if either party disposes of qualified property w/in 2 years Deferred gain would be recognized in year of disposition Dispositions due to death, involuntary conversion, or other non-tax avoidance purposes disregarded ©2011 Pearson Education, Inc. Publishing as Prentice Hall

14 12-14 Transfer of Non-like-kind Property Gain or loss on non-like-kind property FMV – Adjusted Basis Loss on personal use asset not recognized ©2011 Pearson Education, Inc. Publishing as Prentice Hall

15 12-15 Holding Period for Property Received Holding period for like-kind property received includes holding period of like-kind property given up If like-kind property is §1231 asset or capital asset Holding period for boot Begins on day after property received ©2011 Pearson Education, Inc. Publishing as Prentice Hall

16 12-16 Involuntary Conversions Involuntary conversion defined Tax Treatment of Gain due to involuntary conversion into boot Replacement property Time requirements for replacement ©2011 Pearson Education, Inc. Publishing as Prentice Hall

17 12-17 Involuntary Conversion Defined (1 of 2) Includes theft, seizure, requisition, condemnation, or sudden destruction of property Threat of condemnation Reasonable to believe property will be condemned Conversion must be involuntary ©2011 Pearson Education, Inc. Publishing as Prentice Hall

18 12-18 Involuntary Conversion Defined (2 of 2) Gains arise when insurance or government proceeds exceed propertys adjusted basis ©2011 Pearson Education, Inc. Publishing as Prentice Hall

19 12-19 Treatment of Involuntary Conversion Gain Due to Boot (1 of 2) Realized gain Amount received (realized) less basis in property converted Recognized gain Gain deferral achieved by purchasing replacement property amount realized Gain recognized Amount realized – cost of replacement prop. ©2011 Pearson Education, Inc. Publishing as Prentice Hall

20 12-20 Treatment of Involuntary Conversion Gain Due to Boot (2 of 2) Basis of replacement property Cost – deferred gain Carryover of holding period from old property Severance damages Considered part of amount realized from condemnation ©2011 Pearson Education, Inc. Publishing as Prentice Hall

21 12-21 Replacement Property (1 of 2) Functional use test More restrictive than like-kind test E.g., farmland for unimproved land would not meet functional use test Exception Real property condemned only need meet like-kind test ©2011 Pearson Education, Inc. Publishing as Prentice Hall

22 12-22 Replacement Property (2 of 2) Taxpayer-use test Applies to rental property owned by an investor Only requirement is that owner-investor must lease property ©2011 Pearson Education, Inc. Publishing as Prentice Hall

23 12-23 Time Requirements for Replacement Normal replacement period 2 years after end of first taxable year Real 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

24 12-24 Sale of Principal Residence §121 exclusion Principal residence defined Sale of more than one principal residence within a two-year period Nonqualified use after 2008 Involuntary conversion of a principal residence ©2011 Pearson Education, Inc. Publishing as Prentice Hall

25 12-25 §121 Exclusion Taxpayer may exclude up to $250K ($500K if MFJ) on gain from sale of principal residence Must 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 gain Loss is personal and nondeductible ©2011 Pearson Education, Inc. Publishing as Prentice Hall

26 12-26 Principal Residence Defined Taxpayer has only one principal residence E.g., condo, houseboat, or house trailer If taxpayer owns multiple residences, use facts and circumstances test to determine principal residence Includes time spent at each residence ©2011 Pearson Education, Inc. Publishing as Prentice Hall

27 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 period Ownership and use test must be met Available 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

28 12-28 Nonqualified Use After 2008 HSTA of 2008 reduces advantage of converting rental/vacation home into principal residence Gain 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

29 12-29 Involuntary Conversion of a Principal Residence Gain may be deferred under involuntary conversion or principal residence rules Involuntary conversion treated as a sale for purposes of §121 exclusion rules ©2011 Pearson Education, Inc. Publishing as Prentice Hall

30 12-30 Tax Planning Considerations (1 of 2) Avoiding like-kind exchange provisions If taxpayer has capital loss to offset capital gain or Like-kind property will have realized loss ©2011 Pearson Education, Inc. Publishing as Prentice Hall

31 12-31 Tax Planning Considerations (2 of 2) Sale of a principal residence Portion of residence used for business not eligible for §121 exclusion If business portion is a separate structure treat as two separate sales If not separate structure gain due to depreciation not eligible for exclusion ©2011 Pearson Education, Inc. Publishing as Prentice Hall

32 12-32 Compliance and Procedural Considerations Reporting involuntary conversions Must file amended return if defer gain, but do not replace property w/in time frame Reporting sale or exchange of principal residence Gain not excluded reported on Schedule D ©2011 Pearson Education, Inc. Publishing as Prentice Hall

33 Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorados Kenneth W. Monfort College of Business ©2011 Pearson Education, Inc. Publishing as Prentice Hall


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