Like Kind Exchanges and Involuntary Conversions

Question 1

How do we treat gains and losses on like kind exchanges?

Answer 1

• Losses NEVER recognized from like kind exchanges

- Recognized gain lesser of 1) Realized gain or 2) Boot received

Question 2

What are qualifying property for like kind exchange deferrals?

Answer 2

• Only business and investment property

- Not personal property

Question 3

Do exchanges of inventory and receivables qualify for deferral?

Answer 3

No

Question 4

What is like kind property?

Answer 4

• Property that has the same general character as property given up
• All realty is like kind
• Personalty divided into broad asset classes and must be within same class to be like-kind
• Realty for personalty never like kind
• Foreign for US property never like kind

Question 5

What is the holding period of like kind property?

Answer 5

-Takes carryover basis from property surrendered

Question 6

What does receipt of boot trigger in like kind exchanges? Define boot.

Answer 6

• Gain recognition
• If mortgage relief greater than mortgage assumption, treated as boot
• If mortgage assumption greater than mortgage relief, reduces amount realized but does not reduce other boot received
• Nonqualifying property received by taxpayer (including cash)

Question 7

How do you calculate the basis of like kind property? Not like kind property?

Answer 7

FMV of property received
-Postponed gain
+Postponed loss

FMV since gain has been recognized to that extent

Question 8

What’s a big difference between like kind exchanges and involuntary conversions?

Answer 8

-Deferral rules for like kind exchanges are mandatory while elective for involuntary conversions

Question 9

When does deferral provision regarding involuntary conversions apply?

Answer 9

• When a gain is generated because an asset is stolen, destroyed, or condemned
• Taxpayers may elect to defer gains if proceeds from conversion reinvested in similar property within a reasonable amount of time

Question 10

For involuntary conversions, describe requirements for replacement property.

Answer 10

• Replacement property must be similar or related in end use by the taxpayer
• Doesn’t need to be like kind although test here is usually narrower

Question 11

What is the replacement time period for involuntary conversions?

Answer 11

• Within two years of end of yax year in which gain is realized
• Can be extended with IRS permission or if area of conversion declared a disaster area

Question 12

For involuntary conversions, how are excess proceeds over replacement cost treated?

Answer 12

-Recognized as gains limited to realized gain over AB of converted property

Question 13

What is the adjusted basis of new property in an involuntary conversion? Holding period?

Answer 13

• Cost reduced by deferred gain

- Carryover holding period