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Survey Of Taxation > Chapter 12: Nontaxable Exchanges Of Property > Flashcards

Chapter 12: Nontaxable Exchanges Of Property Flashcards

1
Q

Most common transactions that result in nonrecognition of a realized gain or loss

A
  • like-kind exchanges (section 1031)
  • involuntary conversions (section 1033)
  • sale of personal residence (section 121)
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2
Q

Section 1031(a)

A

“No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged soly for real property of like-kind which is to be held either for productive use in a trade or business or for investment”

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3
Q

Is nonrecognition of gain or loss on like-kind property elective?

A

No. If exchange is like-kind then nonrecognition of gain or loss is mandatory.

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4
Q

What determines if property is “like-kind”?

A

About the character or nature (not grade or quality)

Real vs personal
And
Business/trade/investment vs personal-use

(Real property in us and outside us are not like kind exchange)

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5
Q

TCJA limitation of like-kind exchange qualifications

A

After 2017 exchange of like-kind PERSONAL (not real) property no longer qualifies for nonrecognition of gain or loss

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6
Q

Exchange of like-kind securities

A

Like-kind exchange rules do not apply

BUT no gain or loss is recognized if exchanging the same class of security (common stock or preferred stock) of the same corporation even if those stocks have slightly different benefits

Must be SAME class of stock and SAME corporation

Applies between two stockholders or the stockholder and the corporation

Section 1036

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7
Q

Type of exchange required for like-kind exchange rules to applt

A

Must be a direct exchange. Not sale of one property and immediate purchase of another (unless transactions interdependent: such as when taxpayer sells one property to a dealer and purchases like-kind property from the same dealer)

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8
Q

Three party exchanges

A

Wherein one taxpayer trades in like kind exchange with another taxpayer who sells it to a prospective buyer

If single integrated plan still considered a like-kind exchange for the first part of the exchange. Sale is still sale with gain or loss

Exchange may be nonsimultaneous

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9
Q

When is a nonsimultaneous exchange treated as a like-kind exchange

A

Property to be received in exchange must be identified within 45 days after the transfer of the property relinquished in the exchange

Replacement property must be received within the earlier of 180 days after date original property relinquished or the due date for filing the return (including extensions) in the year the transfer occurs

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10
Q

Boot

A

Cash and non-like-kind property given to complete a like-kind property exchange where the property values aren’t equal

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11
Q

How receipt of boot changes tax treatment of like-kind exchange

A

Gain is recognized:
- to the extent of the boot received (cash or FMV of non-like-kind property)
- but limited to amount of realized gain
(So gain is lesser of boot received or realized gain)
Boot does not allow a realized loss on a nontaxable exchange to be recognized

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12
Q

When a property transfer involves the transfer of a liability

A

Amount of liability assumed is considered money received/paid by taxpayer on exchange

If occurs in a like-kind exchange assumption of liability is treated as boot

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13
Q

Property taken subject to liability

A

Taxpayer receiving said property is responsible for the debt only to the extent that the property could be used to pay the debt

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14
Q

Basis of like-kind property received in nontaxable exchange

A

Adjusted basis of property exchanged increase by any gain recognized and reduced by any boot received or loss recognized

(Alternately: FMV - unrecognized gain or + unrecognized loss)

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15
Q

What happens to realized but unrecognized gains and losses from nontaxable exchanfe

A

They are deferred because they are reflected in the basis of the property now held and will be recognized when property is actually disposed of in a taxable transaction

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16
Q

Allocating basis in Like-kind exchange with multiple properties

A

Allocated in proportion to relative FMV on date of exchange

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17
Q

Basis of non-like-kind property received in exchange

A

(boot)

FMV on date of exhange

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18
Q

Exchanges of property between related parties

A

NOT like-kind exchanges of either party disposes of the property within two years of the exchange.

Gain resulting from original exchange recognized in year of disposition (unless from death, involuntary conversion, or non-tax avoidance purposes)

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19
Q

Gain or loss on transfer of non-like-kind property

A

= difference between FMV and the adjusted basis of the non-like-kind property surrendered

(No loss recognized if it is a personal-use asset)

May recognize a loss if the FMV < basis of the non-like-kind asset even if overall transaction is an unrecognized gain

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20
Q

Holding period for like-kind property received in non-taxable exchange

A

Includes holding period of the property exchanged IF the like-kind property surrendered is a capital asset or a section 1231 asset

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21
Q

Holding period for any boot received in an exchange

A

Begins the day after the date of the exchange

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22
Q

Gain due to involuntary conversion of property

A

Taxpayer may elect to defer recognition of the gain if qualifying replacement property is acquired within a specified time period at a cost equal or greater to the amount realized in the conversion

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23
Q

When is no gain recognized on involuntary conversion

A

If property is converted into property similar or related in service or use to the property converted

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24
Q

Basis for replacement property from involuntary conversion

A

Property’s cost reduced by degrees gain on conversion

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25
Q

Is deferral of gain on involuntary conversion elective or mandatory

A

Elective unless property is converted directly into similar property

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26
Q

Loss on involuntary conversion

A

Cannot be deferred

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27
Q

Involuntary conversion of property

A

Property compulsorily or involuntarily converted into money or other property

May be due to theft, seizure, requisition, condemnation, or destruction (complete or partial) of property. (inc government acquisition under eminent domain)

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28
Q

Transfer of property under threat or imminence of requisition or condemnation

A

May permit a taxpayer to defer why gain from sale or exchange. but requires documentation of reasoning for sale and existence of the threat

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29
Q

Sale of property under threat or reasonable belief of imminent condemnation

A

Sale counts as involuntary conversion even if not sold to governmental unit that would be condemning the property

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30
Q

Destruction or sale of livestock because of disease

A

Considered involuntary conversions

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31
Q

When may gain be deferred on involuntarily converted property

A

If the taxpayer makes proper replacement of the converted property within a specified period and elects to defer the gain

Property acquired must have a cost equal than or greater to the amount realized from the conversion

32
Q

Realized gain on involuntary conversion

A

Any excess of the amount received on conversion (reduced by any expenses incurred to determine amount received) over the adjusted basis of the property

Interest received for a delayed payment are ordinary income and not included in calculation of gain or loss

33
Q

If replacement property from involuntary conversion costs less than amount realized from conversion

A

Portion of the realized gain that is excess of the amount realized (full amount, not just gain) over cost of replacement property must be recognized

34
Q

Basis of replacement property purchased from involuntary conversion

A

= cost of replacement - any deferred gain

35
Q

Holding period of replacement property from involuntary conversion

A

ONLY IF GAIN IS DEFERRED: holding period of replacement includes holding period of converted property

36
Q

Severance damages

A

Payment to a taxpayer for the decline in value of property retained if only part of their property is condemned

Considered analogous to insurance proceeds

37
Q

Tax treatment of severance damages

A
  • amounts received as damages reduce the basis of the retained property
  • any amount received in excess of the property’s basis is a gain
  • if severance damages used to restore retained property or replace involuntarily converted property only part not used is immediately taxed
38
Q

Qualified replacement property for property involuntarily converted

A

Must be similar or related in service or use to property converted

Use functional-use test to determine
Sometimes may be with like-kind property
If property owned and leased may use taxpayer-use test

39
Q

Functional-use test

A

Replacement property must be functionally the same as converted property (same use not just same type of property)

40
Q

When may involuntarily converted property be replaced with like kind property

A

If real property held for productive use in a trade or business or for investment is condemned

(Only applies for condemnations. If destroyed the must use functional use test)

41
Q

Replacement of business or investment property involuntarily converted as a result of a presidentially declared disaster

A

May replace property with any tangible property held for productive use in trade or business

42
Q

Taxpayer use test

A

Used in cases of involuntary conversion of rental property owned by an investor

Owner-investor must still lease out replacement property but lessee need not use it for the same functional use

43
Q

How may taxpayers obtain replacement property

A

Generally by purchasing directly

Potentially indirectly by purchasing control of a corporation (80%+ of stock) that owns the replacement property (not valid for purchase of like-kind property to replace condemned real property used in a trade or business or held for investment

44
Q

Time requirement for obtaining replacement for converted property

A

Generally within two years after the close of the taxable year in which any part of the gain is recognized (aka the year in which any proceeds from conversion are received)

May be extended by obtaining permission from IRS

Three years for involuntary conversion of real property held for trade or business via condemnation

45
Q

Tax treatment of gain on the sale of a principal residence after 5/6/97

A

$250,000 of gain ($500,000) MFJ is excludable. Must elect OUT of exclusion it not desired

As long as residence was owned and occupied as a principal residence for at least two years of the five year period preceding three the sale or exchange

46
Q

Restrictions on excluding the gain on sale of principal residence for MFJ

A
  • both meet use test
  • at least one meets ownership test
  • neither spouse is ineligible for exclusions due to the sale or exchange of a residence within the last two years
47
Q

Gain on sale of principal residence in excess of exclusion

A

A capital gain (long term or short term depending on length of ownership)

BUT considered to be investment income so maybe subject to 3.8% tax on her investment income

48
Q

Loss on sale or exchange of a personal residence

A

Not deductible

49
Q

Realized gain on sale of personal residence

A

Amount realized - adjusted basis

(Amount realized is reduced by selling expenses)

50
Q

Adjusted basis of personal residence

A

Original basis (depends on if purchase, gifted, or inherited) including all acquisition costs
+ Capital improvements
+ Any expenses incurred to protect the taxpayer’s title

51
Q

Personal residence purchased before 1997

A

Basis of replacement residence reduced by any deferred gain from previous residence

52
Q

Restrictions on use of exclusion

A

Can only use once every two years

Determined on an individual basis so may claim an exclusion even if spouse used the exclusion within past two years

If spouses maintain separate principal residences exclusion available for each residence

53
Q

What determines principal residence

A

What property the taxpayer resides in a majority of the time

May also consider factors like place of employment, mailing address for bills, voter registration, location of religious/club affiliations

As long as property was principal residence for at least two of the last five years it qualifies. Does not have to be the most recent two years

54
Q

Circumstances when a gain on the sale of a personal residence may be excluded even if within two years of taking the eccludion

A

Part of the gain may be excluded if the sale or exchange is due to a change in employment, health, or unforseen circumstances

55
Q

Determining portion of gain excluded for sale of more than one principal residence in a two year period

A

Exclusion is the ratio of;

  • the shorter of:
    • the period during which the ownership and use tests were met during the five year period ending with the date of sale, or
    • the period of time after the date of the most recent prior sale or exchange for which the exclusion applied until the date of the current sale or exchange

Divided by
- 730 days or 24 months (depending how above is expressed)

  • 250,000 or 500,000

= Exclusion

56
Q

If principal residence is sold before ownership and use tests fully satisfied

A

Partial gain may be excluded if sale due to change in employment, health, or unforseen circumstances

Exclusion = (days use & ownership tests met/ 730 days or 24 months) * full exclusion

57
Q

Residence owned by a deceased spouse

A

Taxpayers ownership period includes period of ownership by deceased spouse

58
Q

If taxpayer or spouse is on extended duty as member of uniformed armed services

A

Any period up to ten years during which taxpayer or spouse is on qualified official extended duty does not count towards the five year period for the ownership/use test

59
Q

Distance test for move due to change in place of employment

A

New place of employment must be at least 50 miles farther from the residence sold or exchanged than was the former place of employment

If no former place of employment: distance between new place of employment and residence sold or exchanged just be at least 50 miles

60
Q

Move due to change in health

A

Need not be taxpayers health, but health of a qualified individual: must be a relative (per dependency standards) but need not be a dependent

A move where the primary reason is to “obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of a disease, illness, or injury or a qualified individual”

61
Q

Unforseen circumstances

A

An event the taxpayer could not reasonably have anticipated prior to purchasing and occupying the residence

Marriage or adoption not considered unforseen (may be able to argue facts and circumstances)

62
Q

Period of Nonqualified use

A

Any period that the property is not used as a principal residence after 2008

But NOT including any portion of the five year period ending on the date of sale that is after the property ceases to be used as a principal residence (so vacating before selling), nor are absences due to change in employment, health conditions, or unforseen circumstances or any period where taxpayer or taxpayer’s spouse is on qualified extended duty

63
Q

Gain from the sale of a principal residence with periods of nonqualified use

A

Gains must be allocated to periods of nonqualified use based on the ration of nonqualified use to total ownership

Gains allocated to the periods of nonqualified use are not excluded from income

64
Q

Gain on the sale of a personal residence that used to be business property

A

Any gain due to depreciation must be recognized, additionally must allocate gain to any period of Nonqualified use after 2008

65
Q

Gain on involuntary conversion of a personal residence

A
  • may be deferred until section 1033 requirements are satisfied (use functional use test)
  • destruction, theft, seizure, requisition, or condemnation all treated as sale so $250,000/500,000 may be excluded from income
66
Q

Gain on involuntary conversion of personal residence if proper and timely replacement is made

A

Can exclude gains of up to $250,000/500,000 and defer the rest

(Amount realized due to induced conversion is reduced by any excluded gain)

Amount deferred increases basis of new residence and the holding period of the old residence is added to that or the replacement

67
Q

Loss due to condemnation of a personal residence

A

Not recognized

68
Q

Loss of personal residence due to casualty

A

Deductible amount based on casualty loss rules for non-business property

69
Q

When might a taxpayer prefer a taxable exchange to a nontaxable

A

If taxpayer has capital losses that would offset the capital gain. Basis in new property would be higher (less likely to have significant gains later)

Also if taxpayer would prefer to recognize a loss may be advantageous to sell property at a loss and purchase new property as a separate transaction

70
Q

If sale and purchase transactions for like kind property done with same party

A

IRS maintains like kind exchange rules apply

71
Q

Tax treatment of sale of house used for both residence and business

A

If business conducted in separate structure: treat of sale of two structures, and may only exclude gain on residential portion

If not separate: gains attributable to depreciation after May 6 1997 are not eligible for exclusion but the rest is

72
Q

How does a taxpayer elect to defer recognition of gain on involuntary conversion

A

Simply does not report the gain as income for the first year in which the gain is recognized

73
Q

If taxpayer defers gain on involuntary conversion but does not make property replacement

A

Must file amended return for the year(s) the election to defer the gain was made

(Including if cost of replacement property was less then cost anticipated at time of election)

74
Q

If taxpayer does not elect to defer gain on involuntary conversion but purchases replacement property within time requred

A

Taxpayer should file a refund claim for the tax year in which the gain was recognized

75
Q

Can an election to defer gain on involuntary conversion be revoked?

A

No. Can only be amended if proper replacement isn’t made or if replacement costs less than expected

76
Q

Can you change which property is designated as replacement property?

A

No

77
Q

How to report the sale of your principal residence

A

Only need to report if have gain that is not excluded. Then use schedule D (show total gain and then show amount excluded as a loss)

Survey Of Taxation (14 decks)

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