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Chapter 12

Chapter 12. Special Property Transactions “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;

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Chapter 12

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  1. Chapter 12 Special Property Transactions “A fool and his money are soon parted. It takes creative tax laws for the rest.” --- Bob Thaves (“Frank & Ernest”)

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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.

  7. 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

  8. 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.

  9. 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

  10. 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

  11. 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

  12. 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.

  13. 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.

  14. 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.

  15. 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.

  16. 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.

  17. 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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