1. ©2008 Prentice Hall, Inc.

2. PROPERTY TRANSACTIONS: NONTAXABLE EXCHANGES
Like-kind exchanges
Involuntary conversions
Sale of principal residence
Tax planning considerations
Compliance and procedural considerations
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

4. Like-Kind Exchanges (2 of 2)
Exchanges between related parties
Transfer of non-like-kind property
Holding period for property received
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

7. A Direct Exchange Must Occur
Sale and subsequent purchase does not qualify unless both transactions interdependent
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

15. Holding Period for Property Received
Holding period for like-kind property received includes holding period of like-kind property given up
Like-kind property must be §1231 asset or capital asset
Holding period for boot
Begins on day after property received
©2008 Prentice Hall, Inc.

16. Involuntary Conversions
Involuntary conversion defined
Tax Treatment of Gain due to involuntary conversion into boot
Replacement property
Time requirements for replacement
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

18. Involuntary Conversion Defined (2 of 2)
Gains arise when insurance or government proceeds exceed property’s adjusted basis
©2008 Prentice Hall, Inc.

19. Treatment of Involuntary Conversion Gain Due to into 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 property
©2008 Prentice Hall, Inc.

20. Treatment of Involuntary Conversion Gain Due to into 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
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

24. Sale of Principal Residence
§121 exclusion
Principal residence defined
Sale of more than one principal residence within a two-year period
Involuntary conversion of a principal residence
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

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 based on days ownership and use test met since last use of exclusion divided by 730 days
©2008 Prentice Hall, Inc.

28. 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
©2008 Prentice Hall, Inc.

29. Tax Planning Considerations
Avoiding the like-kind exchange provisions
If taxpayer has capital loss to offset capital gain or
Like-kind property will have realized loss
Sale of a principal residence
Portion of residence used for business not eligible for §121 exclusion
©2008 Prentice Hall, Inc.

30. 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
©2008 Prentice Hall, Inc.

31. ©2008 Prentice Hall, Inc.