©2015, College for Financial Planning, all rights reserved. Session 8 Like-kind Exchanges and Sale of a Principal Residence CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning

Session Details Module4 Chapter(s)1 and 2 LOs4-1 Analyze a situation to identify an exchange of assets that qualifies for like-kind treatment. 4-2 Analyze a situation to calculate the gain or loss realized, the gain or loss recognized, or the substituted basis for a like-kind exchange. 4-3 Identify the rules related to the Section 121 exclusion. 4-4 Analyze a situation involving a disposition of a personal residence to calculate the gain or loss realized and the gain or loss recognized. 8-2

Like-Kind Exchange—Section 1031 Qualifying Property—property held for productive use in trade or business, or property held for investment purposes Property that is like-kind Real estate for real estate Personalty for personalty property same general asset class or NAICS code for personalty Excluded property Inventory Livestock of different sexes Stocks and bonds U.S. realty for foreign realty U.S. personalty for foreign personalty 8-3

Like-Kind Exchange Calculations 8-4 Realized Gain (What really happened) Recognized Gain (How much is taxed) Substitute Basis (Basis in acquired property) What was received (FMV)  Property  Debt relief  Other boot LESSER OF: 1) Realized gain FMV of qualified property received MINUSORMINUS What was given up (A/B)  Property  Debt assumption  Cash or other property 2) Boot received  Cash  Other nonqualified property  Net debt relief Deferred gain (Realized gain minus recognized gain) EQUALS Realized Gain NO Losses RECOGNIZED

Like-Kind Example Vince Torrel is considering trading a refrigerator that he uses in his tavern for a freezer that Jane Watkins has in her basement. The fair market value of the refrigerator is $850, and Vince’s adjusted basis is $125. The fair market value of the freezer is $850, and Jane’s adjusted basis is $175. Vince plans to use the freezer in his tavern. Calculate Vince’s substitute basis in the freezer. 8-5

Section 121 $250,000/$500,000 exclusion No age limit Principal residence for two of prior five years Once-every-two-years rule MFJ-ownership (not use) attributed between spouses Partial exclusion for health, job, unforeseen circumstances Months of use/24 months x maximum exclusion Nonqualified use—partial exclusion 8-6

Nonqualified Use Use other than as a principal residence after 2008 Applies if property used for nonqualified use is converted to a principal residence Gain attributable to nonqualified use not eligible for the exclusion Nonqualified use after use as a principal residence—not included in this provision 8-7

Review Question 1 In a like-kind exchange, a loss a.may be recognized within certain limitations. b.may be recognized without limitation. c.may be recognized only by the taxpayer who pays boot. d.may not be recognized. 8-8

Review Question 2 The substitute basis of a qualifying asset received in a like-kind exchange is the asset’s a.basis reduced by the gain realized but not recognized. b.basis increased by the gain realized but not recognized. c.fair market value reduced by the gain realized but not recognized. d.fair market value increased by the gain realized but not recognized. 8-9

Review Question 3 In January of 1995, Jim Johnson, then age 57, sold his principal residence in Seattle and took advantage of the once-in-a-lifetime exclusion available under Section 121. At that time, the maximum exclusion was $125,000. He excluded his entire gain on the sale, which was $100,000. Later that year, he purchased a new residence in Denver that he used as his principal residence. Earlier this year, he sold the Denver residence for a realized gain of $300,000. What is the maximum amount of gain, if any, that Jim may exclude under Section 121? a.$0 b.$25,000 c.$250,

Review Question 4 Mary Falcon is a single taxpayer. On January 1, 2014, she received a gift from her mother of a house that immediately became her principal residence. On January 1, 2015, she sold this home for a realized gain of $133,000. She sold the home because she received a job promotion and was transferred to a new location out of state. What is the maximum amount of gain, if any, that may be excluded under Section 121? a.$0 b.$66,500 c.$125,000 d.$133,

Review Question 5 Which one of the following may qualify as a like-kind exchange? a.a heifer exchanged for a bull b.an apartment building located in Miami exchanged for an apartment building located in Mexico City c.farming equipment exchanged for farmland d.a shopping center exchanged for farmland 8-12

Review Question 6 Bob is involved in a like-kind exchange. In the exchange, he assumes a mortgage of $15,000, is relieved of a mortgage of $26,000, and receives $7,000 in cash. How much boot did Bob receive in the transaction? a.$7,000 b.$11,000 c.$18,000 d.$33,

Review Question 7 Robert McCallum has a truck that he uses to make deliveries for his business. The truck has a fair market value of $21,000 and an adjusted basis of $10,000. Robert still owes $9,000 on the truck. Pasqual Mendez has offered to trade his truck for Robert’s truck in an even trade, taking over payments on Robert’s truck. Pasqual’s truck has a fair market value of $12,000 and an adjusted basis of $10,000. What is the amount of Robert’s basis in the acquired property? a.$9,000 b.$10,000 c.$11,000 d.$21,

©2015, College for Financial Planning, all rights reserved. Session 8 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning