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Like Kind Exchanges: IRC Sec 1031

Like Kind Exchanges: IRC Sec 1031. Sale of real estate Typically substantial amount of gain Sec 1250: income to extent of accumulated depreciation taxed at 25% All in one year unless installment sale So use 1031 exchange, rather sale Increase in capital gains rate in future?.

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Like Kind Exchanges: IRC Sec 1031

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  1. Like Kind Exchanges: IRC Sec 1031 • Sale of real estate • Typically substantial amount of gain • Sec 1250: income to extent of accumulated depreciation taxed at 25% • All in one year unless installment sale • So use 1031 exchange, rather sale • Increase in capital gains rate in future?

  2. Like Kind Exchanges: IRC Sec 1031 • Qualifying property • Property held for investment or use in business • Real estate • Vehicles • Farm equipment • Nonqualifying property • Inventory • Stocks and securities

  3. Like Kind Exchanges: IRC Sec 1031 • Like-Kind property • Real estate in U.S. for other property in U.S. • Farm for office building • Apartment building for shopping center • Tenants in common trades • Personal property • Must be same asset class • Trade combine when purchasing new combine • Can’t trade combine for computer

  4. Like Kind Exchanges: IRC Sec 1031 • If no boot (cash, relief of debt received), no gain recognized although gain is realized • If receive boot, gain recognized to extent of lesser of • gain realized or boot received • Basis in property received • Basis in old property • + Cash paid • + Gain recognized • - Cash received

  5. Like Kind Exchanges: IRC Sec 1031 • Like-Kind property • Sally: Farm: FMV $500,000, basis $100,000 • Fred: Office Building: FMV $600,000, basis $300,000 • Sally and Fred trade property and Sally pays Fred $100,000 • Sally: $400,000 gain realized, 0 gain recognized, $200,000 basis in farm • Fred: $300,000 gain realized, $100,000 gain recognized, $300,000 basis in farm

  6. Like Kind Exchanges: IRC Sec 1031 • Related parties • Property received must be held for at least two years • Non-recognition treatment is mandatory if qualify • Assets with a loss

  7. Like Kind Exchanges: IRC Sec 1031 • Forward exchanges: very typical • Sell property now, buy replacement later • Hot money! • Must identify replacement property within 45 days • Maximum of three properties or • Properties with FMV of 200% of property sold • Replacement property purchased within earlier of 180 days or due date of tax return • Qualified Intermediary must hold funds • Often bank: seller can’t have access to funds • Reverse exchanges: buy replacement then sell property, not as common

  8. Sale or Exchange of Assets • No gain recognized until sale of asset • Deferring gain • Specific identification of high basis shares • Multiple lots, not selling entire position • Prior to sale identify • Then receive confirmation • If can’t specifically identify, then FIFO • Generally larger gain

  9. Sale or Exchange of Assets • Average cost • Provided by brokerage firms and mutual funds companies • Single category method used • Total basis/Total shares = basis per share • Specific identification for mutual funds?

  10. Sale or Exchange of Assets • Calls • Buying calls • Expire worthless • Short-term capital loss • Exercise call • Adds to basis of shares • Selling calls (covered calls) • Not exercised • Short-term capital gain • Exercised • Short-term capital gain • Underlying stock may be long-term

  11. Sale or Exchange of Assets • Puts • Buying puts • Expire worthless • Short-term capital loss • Exercise put • Short-term capital gain • Underlying stock may be long-term • Selling puts • Not exercised • Short-term capital gain • Exercised • Decreases basis in stock acquired

  12. Sale or Exchange of Assets • Collars • Concentrated position • Buy put • Sell call to offset cost of buying put • Constructive sale if spread between put and call strike price is small • 20% spread from current price and strike price

  13. Sale or Exchange of Assets • Installment sales • Farm: FMV of $500,000; basis $100,000 • Sale on installment contract • 10 principal payment + 6% interest • Each year have $40,000 capital gain, interest and $10,000 return of basis (not taxable) • Wash sales • Sell stock at a loss • Can’t buy “substantially identical” securities • 30 days before until 30 days after sale • Intel vs. AMD • S&P 500 index funds • Sell in taxable account, buy in IRA

  14. Sale of Personal Residence • Live in home two of last five years • Exceptions. Partial exclusion if: • Sell for health reasons • Move for job • MFJ may exclude up to $500,000

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