104-8 Tax Consequences of Property Transactions: Part 2 Flashcards
Section 1031 Like-kind exchange
Most common example of a nontaxable exchange
Applies only to realty
Boot
Cash, including an assumption of liabilities or receipt of other property
When cash or other property is involved in the exchange to benefit 1 party and equalize the exchange
The presence of boot does not disqualify the entire transaction for like-kind treatment; however, the receipt of boot will:
A) result in the recognition (taxability) of gain if there is a realized gain; or
B) result in no recognition (disallowance) if there is a realized loss
Related party
if like-kind property is exchanged with a related party, the taxpayer and related party must not dispose of the like-kind property received until after 2 years following the exchange
if the related party does dispose of the property within 2 years, all previously deferred gain is recognized immediately
Section 1033 Nontaxable exchanges (Involuntary conversion)
Results from the destruction, theft, seizure, condemnation, sale, or exchange of the taxpayer’s property under threat of condemnation
Section 1033 of the Internal Revenue Code allows a taxpayer who undergoes an involuntary conversion to postpone recognition of the gain
The taxpayer is required to reinvest in a similar property as a replacement property in order to defer or postpone the recognition of any gain that is inherent in the amount the taxpayer was paid for the involuntarily converted property
Section 1033 Replacement Property
General requirement to apply Section 1033 is that the replacement property must be similar in service or use to the involuntarily converted property
- For owner-use, functional-use test applies
- For owner-investor, taxpayer-use test applies
Functional-Use Test
The taxpayer’s use of the replacement property and of the involuntarily converted property must be the same
Taxpayer-Use Test
The owner-investor’s properties must be used in similar endeavors as the previously held properties
Section 1033 Time Limitation
Taxpayer has 2 year time period from end of taxable year in which any gain is realized from an involuntary conversion (e.g. fire) to replace the property
If a condemnation of real property by a governmental authority is the reason for the conversion, this time period is extended to 3 years from the end of the taxable year in which any gain is realized
Section 121 Sale of a Personal Residence
Allows for a gain exclusion up to $250,000 ($500,000 for married filing jointly) to any taxpayer who satisfies certain tests, known as the ownership test and the use test
Ownership test: home must have been owned and used as a principal residence for at least 2 of the 5 years preceding the date of sale (yrs do NOT have to be consecutive)
Use test: either spouse can meet the ownership test, but both must meet the use test
Taxpayer may be entitled to partial exclusion based on the shorter of the taxpayer’s use or ownership
3 Categories of home use
Primary personal use: property is rented for fewer than 15 days/yr, only considered a personal residence, all rent generated during this time is excluded from taxpayer’s income
Primary rental use: rental property is rented at least 15 days a year and is not used for personal use more than the greater of 14 days/yr or 10% of the rental days
Mixed (personal and rental) use: vacation home is rented for at least 15 days/yr and is also used for personal use more than the greater of 14 days/yr or 10% of the rental days
-rental expenses can be deducted only to the extent of rental income
Hobby Rules
Apply when an activity is considered to be a hobby of the taxpayer by the IRS
The only expenses that are deductible are taxes, mortgage interest expense, and casualty losses
