Like-Kind Exchanges

Question 1

What are the key differences between like-kind exchange and involuntary conversion rules?

Answer 1

Like-kind exchange rules are mandatory but involuntary conversion rules are elective. Like-kind exchange rules apply to gains and losses but involuntary conversion rules apply only to gains. Type of replacement property under involuntary conversion rules is narrower than like-kind property.

Question 2

What is the replacement period for involuntary conversions (except for condemned-business realty)?

Answer 2

The replacement must be made within two years from END of tax year in which the gain is realized.

Question 3

List the requirements for deferral due to involuntary conversion.

Answer 3

1. Disposition qualifies as involuntary conversion;
2. Must replace property with property similar or related in service or use;
3. Must be made within two years from end of tax year of conversion (three years in the case of condemnation or threat of condemnation of real property held for productive use in a trade or business or for investment);
4. Boot causes recognition of realized gain.

Question 4

Define “involuntary conversion.”

Answer 4

The result of a casualty (an unexpected, unavoidable outside influence like a storm, fire, shipwreck, a theft, or a condemnation).

Question 5

List the qualifying property for like-kind exchanges.

Answer 5

1. Business or investment property;
2. Not inventory or receivables;
3. Must be “like-kind;”
4. Cannot be across US borders;
5. Special rules when related taxpayers.

Question 6

What is the adjusted basis of replacement property after involuntary conversion?

Answer 6

Cost reduced by any deferred gain.

Question 7

Is realty considered like-kind property?

Answer 7

All Realty is considered to be like-kind; so land is like-kind with a building.