Chapter 12

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Chapter 12

Special PropertyTransactions

“A fool and his money are soon parted.It takes creative tax laws for the rest.”

--- Bob Thaves (“Frank & Ernest”)

LO #1 Like-Kind Exchange Rules

• 3 criteria for a like-kind exchange:– There must be an exchange;– The property transferred and the property

received must be held for productive use in a trade or business or for investment;

– The property must be like-kind.• Exchange rules are not elective

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LO #1 Like-Kind Exchange

• Not eligible for like-kind treatment– Inventory– Stocks, bonds, etc.– Debt instruments– Interest in a partnership– Certificates of trust

• Dealer does not qualify for like-kind exchange treatment

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LO #1 Like-Kind Exchange

• What is a like-kind asset?– Same nature or character– Grade or quality does not matter– Same depreciation class

• Boot Property – any extra consideration given or received other than the like-kind property

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LO #1 Like-Kind Exchange

• Recognized gain is the lesser of:– The FMV of the boot received; or– The realized gain on the exchange.

• Receipt of boot causes recognition of gain

• Giving boot does not cause gain recognition

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LO #1 Like-Kind Exchange

• Basis calculation of property received – Basis of property given– Plus basis of boot given– Plus gain recognized– Less boot received

• Or, FMV of property received less deferred gain.

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LO #1 Like-Kind Exchange

• Time period– 45 days to locate replacement property;– 180 days to receive replacement property.

• Liabilities assumed– Release of a liability is considered boot

received– Presence of a liability can trigger gain

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LO #2 – Involuntary Conversions

• Property is destroyed, stolen, condemned and the taxpayer receives similar property or proceeds.

• Defer entire gain – replacement property must be purchased for an equal or greater amount than the proceeds.

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LO #2 – Involuntary Conversions

• Replacement Property– Similar or related in service or use– More restrictive than the “like-kind” test– Real property can only be “like-kind”

• Replacement Period– Two years after the close of tax year– Three years for real business property

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LO #2 – Involuntary Conversions

• Basis of replacement property– Basis of converted property – Less money not used to replace– Plus money reinvested in excess of

proceeds– Plus gain recognized– Less loss received

• Holding Period – holding period of replacement property includes holding period of property converted

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LO #3 – Installment Sales

• A disposition of property where at least one payment is to be received after the year of sale.

• Installment payments consist of three components:– Interest income– Return of basis– Gain on the sale

• Gross Profit Percentage = gross profit divided by contract price

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LO #3 – Installment Sales

• Dealers cannot use the installment method.

• The installment method cannot be used on the sale of publicly traded stock.

• Any depreciation recapture is recognized in the year the asset is disposed of.

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LO #4 – Sale of Residence

• Married taxpayers can exclude up to $500,000 ($250,000 single) of the gain on the sale of their personal residence

• This provision is an exclusion, not a deferral of gain.

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LO #4 – Sale of Residence

• During a five-year period before the sale, the taxpayer must satisfy:– Ownership Test – owned the home for at

least two years.– Use Test – lived in the home as the main

home for at least two years.

• The tests do not have to be continuous.

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LO #4 – Sale of Residence

• Exclusion applies to only one sale every two years.

• If for health or employment reasons, a reduced exclusion is available for a second sale based on the ratio of days owned divided by 730.

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LO #5 – Related-Party Losses & Wash Sales

• Losses on sales between related parties are disallowed– Related parties include family members

and more than 50% owned entities– Constructive ownership rules apply

• The loss disallowance does not affect the basis of the property to the buyer.

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LO #5 – Related Party Losses & Wash Sales

• Wash sale rules disallow a tax loss where the ownership of a company is not reduced.

• A wash sale occurs if essentially the same stock is purchased 30 days before or 30 days after the sale.

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