Property Transactions: Chapter 12 Property Transactions: Nontaxable Exchanges 1
Learning Objectives Understand the tax consequences arising from a like-kind exchange Determine the basis of property received in a like-kind exchange Determine whether gain from an involuntary conversion may be deferred Determine the basis of replacement property in an involuntary conversion Determine when a gain resulting from sale of principal residence may be excluded 2
Like-kind Exchanges Like-kind Property Defined Refers to nature and quality Same class Personal property for personal property Real property for real property Certain properties do not qualify for like-kind exchange 3
Like-kind Exchanges A Direct Exchange Must Occur Direct exchange not a conversion into proceeds with a subsequent purchase Certain interdependent transactions may receive exchange treatment Three-party exchange 4
Like-kind Exchanges Three-party Exchanges Three parties may be involved in a simultaneous or non-simultaneous like-kind exchange Finding a suitable exchange property may be difficult 5
Like-kind Exchanges Receipt Of Boot Gain is recognized to extent of boot received, limited by realized gain Loss is never recognized Boot is any non-qualifying property Mortgages are offset to determine if there is net boot 6
Like-kind Exchanges Basis Of Property Received Basis of property given up less boot received plus gain recognized Basis of non-qualifying property (boot) is the property’s FMV 7
Like-kind Exchanges Exchanges between related parties Transfer of non-like-kind property Holding period 8
Involuntary Conversions Involuntary Conversion Defined Includes theft, seizure, requisition, condemnation, or destruction of property Gains arise when insurance or government proceeds exceed the property’s adjusted basis Severance damages 9
Involuntary Conversions Tax treatment of gain due to an involuntary conversion directly into similar property Replacement property 10
Involuntary Conversions Obtaining replacement property Taxpayer must purchase the replacement property Time requirements Normal replacement period is 2 years after the end of the first taxable year Property held for use in trade or business can be replaced within 3 years after the end of the tax year 11
Sale Of Principal Residence 12
Sale Of Principal Residence Principal residence defined Taxpayer has only one principal residence It can be condo, houseboat, or house trailer If taxpayer owns multiple residences, facts and circumstances on a case by case basis 13
Sale Of Principal Residence New exclusion applies to sale of principal residence that has been occupied at least two years of the five year period before the sale Must satisfy the ownership and use tests 14
Sale Of Principal Residence Excluded gain Up to $250,000 per individual taxpayer $500,000 for married filing jointly 15
Sale Of Principal Residence Sale of more than one principal residence within two-year period A portion of gain be excluded If due to employment, health or unforeseen circumstances Based on ratio
Sale Of Principal Residence Involuntary conversion of a principal residence may be handled under the involuntary conversion or the principal residence rules 16
Tax Planning Considerations 17
Compliance And Procedural Considerations 18
Compliance And Procedural Considerations Involuntary conversions Reporting sale or exchange of principal residence Gain reported on Schedule D 19