Ch 9: Non-taxable Exchnages Flashcards
What is a nontaxable exchange?
Nontaxable Exchanges - A nontaxable exchange is an exchange in which any gain is not taxed and any loss can not be deducted.
What is the key benefit of a nontaxable exchange?
Allow taxpayers to convert property from one form to another without a tax cost.
What are characteristics of a nontaxable exchange?
Common characteristics of a generic nontaxable
exchange.
• Exchange of one qualifying property for another.
• Equal FMVs of properties exchanged (value-for-value presumption).
• Realized gain or loss is not recognized.
What is a “boot”?
Boot is any non-qualifying property included in the
exchange.
What does “FMV” stand for?
fair market value
What is the purpose of a “boot”?
Inclusion of boot is needed if FMVs of the exchanged
properties are unequal.
How are realized gains recognized when a trade occurs that requires a boot?
Realized gain is recognized up to the FMV of
boot
Assume a person exchanged property that had experienced an unrecognized gain. The exchange featured a boot. How would one calculate taxable base?
Basis of property surrendered + gain recognized −
FMV boot received
—————————-BACKGROUND—————————-
Walter has property with FMV $100, basis $60.
• Jesse has property with FMV $100, basis $110.
• Walter and Jesse exchange properties.
—————————– QUESTION ——————————-
• How much gain do they realize and recognize?
- Walter realizes but does not recognize $40 gain.
* Jesse realizes but does not recognize $10 loss.
—————————-BACKGROUND—————————-
Walter has property with FMV $100, basis $60.
• Jesse has property with FMV $100, basis $110.
• Walter and Jesse exchange properties.
—————————– QUESTION ——————————-
• What is their basis in the new property?
Walter’s basis in his new property is $60 (FMV
$100 − $40 deferred gain).
• Jesse’s basis in his new property is $110 (FMV
$100 + $10 deferred loss)
—————————-BACKGROUND—————————-
Jon has qualifying property with a $1,000 FMV
and $700 basis. Tyrion has qualifying property
with a $900 FMV and $100 cash.
—————————– QUESTION ——————————-
• If they enter into an exchange, what is Jon’s
realized and recognized gain?
Jon’s realized gain is $300.
He recognizes $100 gain and defers $200 gain
(Recognized gain is equal to the FMV of the boot received)
—————————-BACKGROUND—————————-
Jon has qualifying property with a $1,000 FMV
and $700 basis. Tyrion has qualifying property
with a $900 FMV and $100 cash.
—————————– QUESTION ——————————-
• What is Jon’s basis in the property received?
Jon’s basis in the property received is $700.
• $700 substituted basis + $100 gain recognized − $100
boot received.
• $900 FMV − $200 deferred gain.
—————————-BACKGROUND—————————-
Tyrion exchanges qualifying property with a $900
FMV and $280 basis plus $100 cash for qualifying property with a $1,000 FMV.
—————————– QUESTION ——————————-
• What is Tyrion’s realized and recognized gain?
Tyrion’s entire $620 realized gain on the exchange
of qualifying property is deferred.
—————————-True / False ——————————–
Paying cash boot does not trigger gain recognition
TRUE
• The substituted basis rule when boot is paid.
• Basis of qualifying property surrendered + FMV of
boot paid.
What are the four types of nontaxable exchanges?
• Like-kind exchanges. • Involuntary conversions. • Exchanges of property for equity in a corporation or partnership. • Wash sales.
—————————-BACKGROUND—————————-
• Archer owns an office building with $200,000 FMV and $70,000 basis.
• Lana owns investment land with a $170,000 FMV
and $115,000 basis.
—————————– QUESTION ——————————-
• If Archer and Lana decide to exchange realty,
who must pay boot to equalize the exchange?
Lana must pay Archer $30,000 boot
—————————-BACKGROUND—————————-
• Archer owns an office building with $200,000 FMV and $70,000 basis.
• Lana owns investment land with a $170,000 FMV
and $115,000 basis.
—————————– QUESTION ——————————-
• What is each’s realized gain and recognized gain?
• Archer realizes $130,000 gain ($170,000 FMV of
land + $30,000 cash − $70,000 basis of office
building) and recognizes $30,000 gain (boot
received).
• Lana realizes $55,000 gain ($200,000 FMV of
office building − $145,000 total basis of land and
cash) and recognizes no gain.
What is “REALIZED GAIN” ?
Realized gain is defined as the net sale price minus the adjusted tax basis.
What is the “ADJUSTED TAX BASIS” ?
Adjusted Tax Basis refers to the original cost or other basis of property, reduced by depreciation deductions and increased by capital expenditures.
What is the “RECOGNIZED GAIN” ?
Recognized gain is the taxable portion of the realized gain.
What is the objective in a tax-deferred exchange?
The common objective in a tax deferred exchange is disposing of a property containing significant realized gain and acquiring a “like-kind” replacement property so there is no recognized gain.
In order to defer all capital gain taxes.
What is an involuntary conversion?
Refer to cases in which you receive compensation for the destruction, theft or confiscation of property
————————— BACKGROUND ———————
Assume an involuntary loss occurs.
————————- TRUE / FALSE ————————-
If insurance proceeds exceed basis of converted
property, the taxpayer may elect to defer gain
recognition.
TRUE
————————— BACKGROUND ———————
Assume an involuntary loss occurs.
————————- TRUE / FALSE ————————-
If basis of converted property exceeds insurance
proceeds, the taxpayer recognizes ordinary loss
TRUE
————————— BACKGROUND ———————
Assume an involuntary loss occurs.
————————- QUESTION ————————-
What are the requirements for a deferred gain?
Requirements to defer gain:
• Reinvest proceeds in property similar or related in
service or use to converted property.
————————— BACKGROUND ———————
Saul’s factory had a $500,000 adjusted basis.
The factory was destroyed by a tornado, and
Saul received $650,000 from the insurance
company.
————————- QUESTION ————————-
What is Saul’s realized gain?
Saul realized a $150,000 gain on the involuntary
conversion.
————————— BACKGROUND ———————
Saul’s factory had a $500,000 adjusted basis.
The factory was destroyed by a tornado, and
Saul received $650,000 from the insurance
company.
————————- QUESTION ————————-
What is Saul’s recognized gain?
If Saul pays $700,000 to build a replacement
factory, he may elect to defer recognizing the gain
————————— BACKGROUND ———————
Saul’s factory had a $500,000 adjusted basis.
The factory was destroyed by a tornado, and
Saul received $650,000 from the insurance
company.
————————- QUESTION ————————-
If Saul pay’s $700,000 for the new factory, what is Saul’s basis in the new factory?
His basis in the new factory is $550,000 ($700,000
cost − $150,000 deferred gain).
