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ch. 12 Property Transactions: Nontaxable Exchanges (Like-Kind Exchanges…
ch. 12 Property Transactions: Nontaxable Exchanges
Like-Kind Exchanges
Like-Kind Property Defined
A Direct Exchange Must Occure
Three-Party Exchanges
Receipt of Boot
Basic of Property Received
Exchanges Between Related Parties
Transfer of Non-Like-Kind Property
Holding Period for Property Received
Involuntary Conversions
Section 1033
Involuntary Conversion Defined
Treat of Condemnation: If a threat of condemnation exists and the taxpayer has reasonable grounds to believe that the property will be condemned, Sec. 1033 applies even if the taxpayer sells the property to an entity other than the governmental unit that is threatening to condemn the property
Conversion Must Be
Involuntary
An
Involuntary Conversion
may be due to theft, seizure, requisition, condemnation, or destruction of the property.
occurs when a governmental unit exercises its power of eminent domain to acquire the taxpayer's property without the taxpayer's consent
Generally results from a
Casualty
or
Condemnation
, but also
Certain transactions involving livestock
(e.g. the destruction or sale of livestock because of disease).
Tax Treatment of Gain Due to Involuntary Conversion into Boot
Realized Gain
The Excess of the amount received due to the involuntary conversion over the adjusted basis of the property converted
Interest (income because of delayed payment) are NOT included in determining the amount realized
Gain Recognized
One must purchase replacement property with a cost equal to or greater than the amount realized from the involuntary conversion
The recognized gain is LESSER of the realized gain or the excess of the amount realized over the cost of the replacement property
Basis of Replacement Property = its cost - any deferred gain
Severance Damages
taxpayer may receive severance damages if a portion of the taxpayer's property is condemned
receive as compensation for a decline in the value of the retained property
Severance damages reduces the basis of the portion of the taxpayer's property (e.g. 25-acre)
Qualified Replacement Property
Functional-Use Test
Own and Use the property
To be considered similar or related in service or use - must be functionally the same as the converted property (e.g. land to land; building to building)
Replacement with Like-Kind Property
If REAL PROPERTY held for productive use
in a trade or business or for investment
is CONDEMNED - like-kind property
Taxpayer-Use test
Own and Lease the property
the involuntary conversion of rental property owned by an investor
Greater flexibility than Functional-Use test
The owner-investor must lease out the replacement property that is acquired
Obtaining Replacement Property
the Taxpayer must purchase the replacement property
May purchase replacement property indirectly by purchasing control of corporation that owns the replacement property
NOT applicable to the purchase of like-kind property
Time Requirements for Replacement
Begins w/ the date disposition of the converted property and
Ends "2 years after the close of the first taxable year in which any part of the
gain
upon the conversion is
realized
."
Exception: Condemned Real Property - 3 years
Sale of Principal Residence
Principal Residence Defined
Sale of More than One Principal Residence Within a Two-Year Period
Nonqualified Use after 2008
Involuntary Conversion of a Principal Residence
Tax Planning Consideration
Avoiding the Like-Kind Exchange Provisions
Sale of Principal Residence
Compliance and Procedural Consideration
Reporting of Involuntary Conversions
Reporting of Sale of Exchange of a Principal Residence