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Disposition of Business Assets (Was the asset sold or damaged? (Casualty…

- - - - Like-kind Definition: The nature or character, not grade or quality, of the property. Improvements or unimprovements is irrelevant b/c that is its grade or quality and not its kind or class. (26 C.F.R. § 1.1031(a)-1(b)
      - Yes
        
        Like-kind exchange
        
        Definition: The business asset is exchanged for the same type of business asset
        
        Is the asset real or personal property?
        
        Real Property: All buildings and structures that can be considered real estate (26 USC § 168(d)(2))
        
        Is the real property held primary for sale?
        
        Yes
        
        No
        
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        Personal Property: All other tangible property used in producing income. (Not explicitly stated)
        
        How to calculate Realized Gain or Loss and the new property's Basis.
        
        Amount Realized – Adjusted Basis = Realized Gain or Loss
        
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        Realized Gain or Loss: The difference between the Amount Realized from the disposition of the asset and the Basis for that asset.
      - No
        
        Is(are) the payment(s) for the sale of the asset made in installments?
        
        No
        
        How to calculate realized gain or loss
        
        Amount Realized – Adjusted Basis = Realized Gain or Loss
        
        Adjusted Basis: What the owner still has invested in the item. (Acquisition Costs + Capital Additions – Allowable Depreciation = Adjusted Basis)
        
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        Amount Realized: The cash received plus the fair market value (FMV) of any other property received in the transaction. (Cash + FMV = Amount Realized) (26 USC § 1001(b)).
        
        Example: The Fast and Furious Auto Company sells a forklift it purchased three years ago for $35,000. As payment, it receives $12,000 cash and a piece of land with a fair market value of $6,000. In this case, the land is not like-kind property; it is a personal asset exchanged for a real-property asset. The company took the proper amount of tax depreciation over the time it owned the forklift; this depreciation amounts to $19,695. (Fast & Furious recorded all depreciation through the current year.) What is the amount of gain or loss on this sale?
        
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        Realized Gain or Loss: The difference between the Amount Realized from the disposition of the asset and the Basis for that asset.
        
        Yes
        
        How to calculate Recognized gain
        
        Amount Recognized: Realized Gain x Gross-Profit Percentage (Taxpayer may elect to opt out)
        
        Realized Gain = Amount Realized – Adjusted Basis
        
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        Elect to opt out: A taxpayer can elect not to have an installment sale recognized as such—in this case, all income from the sale may be recognized in the year of sale. (See NOT an installment plan) (26 USC § 453(d)(1–3))
        
        Realized Gain or Loss: The difference between the Amount Realized from the disposition of the asset and the Basis for that asset.
      - Both
        
        How to calculate realized gain or loss and the New Basis for the received property
        
        Realized Gain or Loss: The difference between the Amount Realized from the disposition of the asset and the Basis for that asset.
        
        Gain
        
        The LESSER of the Realized Gain and the Boot received. (26 USC § 1031(b))
        
        Example: Arthur Chester Restaurant Company has a restaurant building with a current value of $320,000 and an adjusted basis of $157,900. The company exchanges it for a restaurant building from Winston Bridges, Inc., that has a current value of $290,000. Arthur Chester required Winston to pay $30,000 in cash as well, so that this is an equal-value exchange. What is the amount of realized and recognized gain for Arthur Chester Restaurant?
        
        Amount Realized – Adjusted Basis = Realized Gain
        
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        Boot: $30,000 cash
        
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        Recognized Gain or Loss: Gain is the amount of gain that is included in gross income. Loss is the amount of loss from the disposition that is deductible per the code.
        
        Fair Market Value (FMV) of the like-kind property received – the Gain NOT Recognized = New Basis
        
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        Boot: The additional receipt of non-like-kind property for the asset
        
        Loss
        
        NO Recognized Loss (26 USC § 1031(c))
        
        Example: Arthur Chester Restaurant Company has a building with a current value of $270,000 and an adjusted basis of $268,000. The company exchanges it for a building from Winston Bridges, Inc., with a current value of $250,000. Arthur Chester also required Winston to pay $10,000 in cash. What is the amount of realized and recognized gain or loss for Arthur Chester Restaurant?
        
        Fair Market Value (FMV) of the like-kind property received + the Loss NOT Recognized = New Basis
        
        FMV of the like-kind property received: $250,000
        
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  - - - Determing Loss from event:
        Partial Destruction: Loss is whichever is less:
        
        the Fair Market Value (FMV) of the asset before the event minus the FMV after
        
        the Adjusted Basis of the asset
        
        Total Destruction (also theft): the Adjusted Basis
        
        Determined Loss – Insurance Reimbursement Received or Allowed = Realized Gain or Loss
        
        Loss
        
        Deduction ALLOWED
        
        Example: Glancey Company, a sole proprietorship owned by Ted Glancey, is located in Alabama. During the current year, a tornado ripped through the small town where Glancey Company is located; the company sustained damage, with some assets damaged and some destroyed. Luckily, the company has insurance to cover some of the damage. Its insurance policy holds a zero deductible. Following are the assets that sustained damage or destruction and the insurance proceeds received for each.
        
        Building | FMV Before: $675,000; FMV After: $500,000; Adjusted Basis: $480,000; Insurance Proceeds: $50,000
        
        Machine | FMV Before: $120,000; FMV After: $0; Adjusted Basis: $75,000; Insurance Proceeds: $70,000
        
        Tractor | FMV Before: $100,000; FMV After: $80,000; Adjusted Basis: $90,000; Insurance Proceeds: $35,000
        
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        Gain (26 USC § 1033)
        
        Replaced w/like-kind
        
        NO gain recognized at the time of the exchange (26 USC § 1033(a)(1))