Like Kind Exchanges: IRC Sec 1031  Sale of real estate Typically substantial amount of gain  Sec 1250: income to extent of accumulated depreciation taxed at 25%  All in one year unless installment sale So use 1031 exchange, rather sale  Increase in capital gains rate in future?

Like Kind Exchanges: IRC Sec 1031  Qualifying property Property held for investment or use in business  Real estate  Vehicles  Farm equipment  Nonqualifying property Inventory Stocks and securities

Like Kind Exchanges: IRC Sec 1031  Like-Kind property Real estate in U.S. for other property in U.S.  Farm for office building  Apartment building for shopping center  Tenants in common trades  Personal property Must be same asset class  Trade combine when purchasing new combine  Can’t trade combine for computer

Like Kind Exchanges: IRC Sec 1031  If no boot (cash, relief of debt received), no gain recognized although gain is realized If receive boot, gain recognized to extent of lesser of  gain realized or boot received  Basis in property received Basis in old property + Cash paid + Gain recognized - Cash received

Like Kind Exchanges: IRC Sec 1031  Like-Kind property  Sally: Farm: FMV $500,000, basis $100,000  Fred: Office Building: FMV $600,000, basis $300,000  Sally and Fred trade property and Sally pays Fred $100,000  Sally: $400,000 gain realized, 0 gain recognized, $200,000 basis in farm  Fred: $300,000 gain realized, $100,000 gain recognized, $300,000 basis in farm

Like Kind Exchanges: IRC Sec 1031  Related parties Property received must be held for at least two years  Non-recognition treatment is mandatory if qualify Assets with a loss

Like Kind Exchanges: IRC Sec 1031  Forward exchanges: very typical Sell property now, buy replacement later  Hot money!  Must identify replacement property within 45 days Maximum of three properties or Properties with FMV of 200% of property sold  Replacement property purchased within earlier of 180 days or due date of tax return Qualified Intermediary must hold funds  Often bank: seller can’t have access to funds  Reverse exchanges: buy replacement then sell property, not as common

Sale or Exchange of Assets  No gain recognized until sale of asset  Deferring gain Specific identification of high basis shares  Multiple lots, not selling entire position  Prior to sale identify  Then receive confirmation If can’t specifically identify, then FIFO  Generally larger gain

Sale or Exchange of Assets  Average cost Provided by brokerage firms and mutual funds companies  Single category method used Total basis/Total shares = basis per share Specific identification for mutual funds?

Sale or Exchange of Assets  Calls Buying calls  Expire worthless Short-term capital loss  Exercise call Adds to basis of shares Selling calls (covered calls)  Not exercised Short-term capital gain  Exercised Short-term capital gain Underlying stock may be long-term

Sale or Exchange of Assets  Puts Buying puts  Expire worthless Short-term capital loss  Exercise put Short-term capital gain Underlying stock may be long-term Selling puts  Not exercised Short-term capital gain  Exercised Decreases basis in stock acquired

Sale or Exchange of Assets  Collars Concentrated position  Buy put  Sell call to offset cost of buying put Constructive sale if spread between put and call strike price is small 20% spread from current price and strike price

Sale or Exchange of Assets  Installment sales Farm: FMV of $500,000; basis $100,000  Sale on installment contract 10 principal payment + 6% interest  Each year have $40,000 capital gain, interest and $10,000 return of basis (not taxable)  Wash sales Sell stock at a loss Can’t buy “substantially identical” securities  30 days before until 30 days after sale Intel vs. AMD S&P 500 index funds Sell in taxable account, buy in IRA

Sale of Personal Residence  Live in home two of last five years Exceptions. Partial exclusion if:  Sell for health reasons  Move for job  MFJ may exclude up to $500,000