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2. PROPERTY TRANSACTIONS: NONTAXABLE EXCHANGES
Like-kind exchanges
Involuntary conversions
Sale of principal residence
Tax planning considerations
Compliance and procedural considerations
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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
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4. Like-Kind Exchanges (2 of 2)
Exchanges between related parties
Transfer of non-like-kind property
Holding period for property received
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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
©2010 Pearson Education, Inc. Publishing as Prentice Hall

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
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7. A Direct Exchange Must Occur
Sale and subsequent purchase does not qualify unless both transactions interdependent
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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
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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
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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
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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
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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
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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
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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
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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
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16. Involuntary Conversions
Involuntary conversion defined
Tax Treatment of Gain due to involuntary conversion into boot
Replacement property
Time requirements for replacement
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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
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18. Involuntary Conversion Defined (2 of 2)
Gains arise when insurance or government proceeds exceed property’s adjusted basis
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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.
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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
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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
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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
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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
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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
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§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
©2010 Pearson Education, Inc. Publishing as Prentice Hall

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
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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
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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]
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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
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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
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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
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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
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33. ©2010 Pearson Education, Inc. Publishing as Prentice Hall