Nontaxable Exchanges Like-Kind Exchanges - 1031

NONTAXABLE EXCHANGES
In a nontaxable exchange, the recognition of gain or loss is postponed.
LIKE-KIND EXCHANGES—§ 1031

1. No gain or loss will be recognized
The like-kind provisions are mandatory if the following requirements are satisfied.
a. The form of the transaction is an exchange.
b. Both properties transferred and received are held for a trade or business or for investment.
c. The property is considered like-kind.
2. Like-Kind Property
a. Real property (rental buildings, warehouses and land)
b. The exchanges do not qualify if they involve (a) inventory (b) financial instruments (stock) (c) personal property (d)
personal use assets (e) U.S. and foreign real property.
3. Boot.
Property that is not like-kind, including cash, is referred to as boot.
a. The receipt of boot will trigger recognition of gain. The amount of the recognized gain is the lesser of the boot
received or the realized gain.
b. The receipt of boot does not result in recognition of loss
c. The giving of boot usually does not trigger recognition.
d. If appreciated or depreciated property boot is given, the difference between the FMV and the basis is the
gain/loss recognized on the boot; realized gain/loss on like-kind property is deferred.
4. Basis and Holding Period of Property Received
1. The basis of like-kind property received in the exchange is the property’s fair market value less postponed
gain or plus postponed loss. The basis of any boot received is the boot’s fair market value.
2. The holding period of the like-kind property given up carries over and "tacks on" to the holding period of the
like-kind property received. For any boot received, the holding period will begin from the date of the exchange.
Sarah exchanges a building and land (used in her business) for Tyler’s land and building and some equipment (used in
his business). The assets have the following characteristics.
a. What are Sarah’s recognized gain or loss and basis for the land and building and equipment acquired from Tyler?
(220,000+80,000)-120,000=180,000. The realized gain is 180,000, the recognized gain is 80,000.
The adjusted basis for realty acquired is 120,000 (220,000FMV- 100,000 postponed gain), and her adjusted basis for
the equipment acquired is its FMV of 80,000
b. What are Tyler’s recognized gain or loss and basis for the land and building acquired from Sarah?
300,000
300,000-(60,000+50,000) =190,000. The realized gain is 190,000, the recognized gain is 30,000 (appreciation in boot)
His adjusted basis for the realty acquired from Sarah is 140,000 (300,000FMV-160,000 postponed gain)
Laura receives a parking garage (to be used in her business) with a fair market value of $50,000 in exchange for a plot
of land she had held for investment. The land was purchased in April 2011for $12,000 and has a current fair market
value of $48,000. In addition to transferring the land, Laura pays an additional $2,000 to the other party.
What is Laura’s adjusted basis for the parking garage?
50,000-(12,000+2000) =36,000. The realized gain is 36,000, the recognized gain is 0.
50,000FMV- 36,000 postponed gain =14,000 adjusted basis
The giving boot does not trigger the recognition of the realized gain.
Stephanie owns land (adjusted basis of $90,000; fair market value of $125,000) that she uses in her business. She
exchanges it for another parcel of land (worth $100,000) and stock (worth $25,000). Determine Stephanie’s:
a. Realized and recognized gain or loss on the exchange.
125,000-90,000=35,000. The realized gain is 35,000, and the recognized gain is 25,000 (lesser of boot received)
b. Basis in the new land.
100,000FMV-10,000 postponed gain=90,000
c. Basis in the stock she received.
FMV of 25,000
What is the basis of the new property in each of the following exchanges?
IBM common stock (adjusted basis of $20,000) for ExxonMobil common stock (fair market value of $28,000).
does not qualify as a like-kind exchange. The basis of the newly acquired asset is equal to its FMV of 28,000.
Rental house (adjusted basis of $90,000) for mountain cabin to be held for rental use (fair market value of $225,000).
90,000 (225,000-135,000 postponed gain)
General partnership interest (adjusted basis of $400,000) for a limited partnership interest (fair market value of
$580,000).
does not qualify as a like-kind exchange. The basis of the newly acquired asset is equal to its FMV of 580,000.
Tab exchanges real estate used in his business along with stock for real estate to be held for investment. The stock
transferred has an adjusted basis of $45,000 and a fair market value of $50,000. The real estate transferred has an
adjusted basis of $85,000 and a fair market value of $190,000. The real estate acquired has a fair market value of
$240,000.
a. What is Tab’s realized gain or loss?
Realized gain=110,000 (240,000-45,000-85,000)
b. His recognized gain or loss?
5000 (gain on depreciated stock)
c. The basis of the newly acquired real estate?
135,000 (240,000FMV-105,000 postponed gain)
Frank will transfer realty (adjusted basis of $52,000; fair market value of $80,000) and Tom will exchange realty
(adjusted basis of $60,000; fair market value of $92,000). Tom’s property is subject to a mortgage of $12,000 that will
be assumed by Frank.
a. What are Frank’s and Tom’s recognized gains?
Frank: 92,000-(52,000+12,000) = 28,000 The realized gain is 28,000; the recognized gain is 0
Tom: (80,000+12,000)-60,000=32,000 The realized gain is 32,000; the recognized gain is 12,000
b. What are their adjusted bases?
Frank: 92,000 FMV-28,000 postponed gain=64,000
Tom: 80,000 FMV- 20,000 postponed gain= 60,000
INVOLUNTARY CONVERSIONS—§ 1033

1. destruction, theft, seizure, requisition or condemnation
2. The basic rules of the provision follow.
a. If the amount realized >amount reinvested, realized gain is recognized to the extent of the excess.
b. If the amount reinvested > amount realized, realized gain (proceed-adjusted basis)is not recognized.
3. Losses on the conversion will be recognized.
4. Replacement Property
a. For an owner-investor, the taxpayer use test applies: the properties must be used by the owner-investor in
similar endeavors.
b. For an owner-user, the functional use test applies. The taxpayer’s use of the replacement property and of the
involuntarily converted property must be the same.
c. Business or investment realty need only be replaced by like-kind property if it has been condemned.
6. The taxpayer has a two-year period to replace the property
7. Direct conversion: If the conversion is directly into replacement property rather than into money, nonrecognition of
realized gain is mandatory (warehouse for warehouse)
a. Frank owns a warehouse that is destroyed by a tornado. The space in the warehouse was rented to various tenants.
The adjusted basis was $470,000. Frank uses all of the insurance proceeds of $700,000 to build a shopping mall in a
neighboring community where no property has been damaged by tornadoes. The shopping mall is rented to various
tenants.
Because Frank is an owner-investor, the taxpayer use test applies. Replacing the warehouse that is rented to various
tenants with a shopping mall that is rented to various tenants in a different location qualifies as replacement property.
700,000-470,000=230,000 Realized gain is 230,000; recognized gain is 0
700,000-230,000 postponed gain=470,000 The basis of the replacement property is 470,000
b. Juanita owns a building that she uses in her retail business. The adjusted basis is $250,000. The building is
destroyed by a hurricane. She uses all the insurance proceeds of $300,000 to buy a four-unit apartment building in
another city.
Because her use of the apartment building is different from the use of the building in her retail business, the apartment
building does not qualify as replacement property.
300,000-250,000=50,000 the realized the recognized gain is 50,000.
The basis for the apartment building is its cost of 300,000
Edith’s warehouse (adjusted basis of $450,000) is destroyed by a hurricane in October 2019. Edith, a calendar year
taxpayer, receives insurance proceeds of $525,000 in January 2020. Calculate Edith’s realized gain or loss, recognized
gain or loss, and basis for the replacement property if she:
a. Acquires a new warehouse for $550,000 in January 2020.
525,000-450,000=75,000 realized gain is 75,000 recognized gain is 0
His basis for the replacement warehouse is 475,000 [550,000-75,000 postponed gain]
b. Acquires a new warehouse for $500,000 in January 2020.
525,000-450,000=75,000. Realized gain is 75,000, recognized gain is 25,000
his recognized gain is calculated as follows:
525,000-500,000 (reinvestment)=25,000
His basis for the replacement building is 450,000 [500,000-50,000 postponed gain]
c. Does not acquire replacement property.
525,000-450,000=75,000 Realized and recognized gain is 75,000
None of the realized gain is postponed because he did not acquired qualifying replacement property.
SALE OF A RESIDENCE- § 121

1. A realized loss from the sale of a personal residence is not recognized
2. A realized gain from the sale of a personal residence is recognized. However, taxpayers meeting the § 121
exclusion requirements can exclude up to $250,000 of realized gain. Any gain in excess of this amount are long-term
capital gain.
3. Requirement: the residence must have been owned and used by the taxpayer as the principal residence for at least
two years during the five-year period ending on the date of the sale. Short absences and short-term rental of the
property is ignored.
4. A sale will not qualify if it occurs within two years of a previous qualifying sale.
5. The amount realized is the selling price less any selling expenses. Repairs and maintenance costs are not
deductible
6. If a married couple files a joint return, the $250,000 amount is increased to $500,000 if the following requirements
are met.
Either spouse meets the at-least-two-years ownership requirement.
Both spouses meet the at-least-two-years use requirement.
Neither spouse sold a principal residence within the prior two years and used the § 121 exclusion.
7. Change in place of employment,
Health issues, or
Unforeseen circumstances (as identified in the Regulations).
Each of these exceptions provides a partial exclusion: the numerator of which is the number of qualifying months
and the denominator of which is 24 months. The resulting amount is the excluded gain.
8. The residence could have been rental property or the home office to qualify for the § 121 exclusion
If the taxpayer deducted depreciation, any realized gain is recognized to the extent of the depreciation deductions.
On December 5, 2019, Amanda sells her principal residence, which qualifies for the § 121 exclusion. Her realized gain is
$190,000. From January through November 2018, she was temporarily out of town on a job assignment in another city and
rented the residence to a college student. For this period, she deducted MACRS cost recovery of $7,000.
Without the depreciation provision, Amanda could exclude the $190,000 realized gain. However, the depreciation taken
requires her to recognize $7,000 of the realized gain.
Wesley and the purchaser signed a contract to sell for $363,000. Wesley’s adjusted basis for the house is $200,000.
He owned and occupied the house for seven years. On October 1, 2019, Wesley purchases another residence for
$325,000.
a. Calculate Wesley’s recognized gain on the sale.

363,000-21780-600-300-800=339520 (amount realized)
339520-200,000=139,520 (realized gain)-139,0520 (121 exclusion) =0 recognized gain
b. What is Wesley’s adjusted basis for the new residence?
His basis for his new residence is its cost of 325,000
c. Assume instead that the selling price is $800,000. What is Wesley’s recognized gain? His adjusted basis for the new
residence?
800,000-23480=776,520 (amount realized)
776,520-200,000=576,520 (realized gain)-250,000=326,520 (recognized gain)
His basis for his new residence is its cost of 325,000

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NONTAXABLE EXCHANGES

In a nontaxable exchange, the recognition of gain or loss is postponed.

LIKE-KIND EXCHANGES—§ 1031

INVOLUNTARY CONVERSIONS—§ 1033

SALE OF A RESIDENCE- § 121

a. Calculate Wesley’s recognized gain on the sale.

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