Like-Kind Exchanges - Examples Flashcards
Like-Kind Exchanges - Character of the Property
For example, Eric owns an apartment building held for investment. Eric exchanges the building for farmland to be used in his trade or business. The exchange is a like-kind exchange because both the building and the
farmland are classified as real property and both properties are used either in business or held for investment.
In another example, Trail Corporation exchanges improved real estate for unimproved real estate, both of which are held for investment. The exchange is a like-kind exchange.
Like-Kind Exchanges - Exchanges of Securities
For example, Kelly owns common stock of Best Corporation. Best issues class B common stock to Kelly, in exchange for her common stock. No gain or loss is recognized because this is an exchange of common stock for common stock in the same corporation.
Like-Kind Exchanges - Three-Party Exchanges
For example, Jim wants to buy Kathy’s Nebraska farm. Kathy does not want to sell her farm but wants to exchange the farm for an apartment complex in Arizona that is available for sale. Jim purchases the apartment complex in Arizona from Allyson and transfers it to Kathy in exchange for Kathy’s farm. The farm and the apartment complex each have a $900,000 Fair Market Value (FMV). For Kathy, the transaction qualifies as a like-kind exchange because it is a direct exchange of business real property (the farm) for investment real estate (the apartment in Arizona). For Jim, the exchange is not a like-kind exchange. The purchase of the apartment complex in Arizona does not represent 1231 property because Jim has not met the holding period requirements. Only 1231 property that is 1250 property (requires at least a 1 year+ holding period) qualifies for like- kind exchange treatment.
Like-Kind Exchanges - Non-simultaneous Exchange
For example, on May 5, 2024, Joel transfers property to Lauren, who transfers cash to an escrow agent (who may not be an agent of Joel, such as his attorney or accountant). The escrow agent is to purchase suitable like-kind property for Joel. Joel does not have actual or constructive receipt of the cash during the delayed period. To be a like-kind exchange for Joel, the suitable like-kind property must be identified by June 19, 2024 (45 days after the transfer) and Joel must receive the property by November 1, 2024 (180 days after the transfer).
Assume the same facts as above except that the transfer by Joel occurs on November 8, 2024. To be a like-kind exchange for Joel, the suitable like-kind property must be identified by December 23, 2024 and Joel must receive the property by April 15, 2025 unless Joel files an automatic six-month extension for the filing of his return (that is, the due date is extended until October 15, 2025). In such a case, the property must be received no later than 180 days following the transfer of the property relinquished in the exchange, or by May 7, 2025 (180 days after November 8, 2024).
Like-Kind Exchanges - Receipt of Boot
For example, Mario exchanges a parking lot with a $500,000 adjusted basis for $100,000 cash and an apartment building with a $650,000 FMV. The realized gain is $250,000 ($750,000 − $500,000). Because the $100,000 of boot received is less than the $250,000 of realized gain, the recognized gain is $100,000.
Mary exchanges a parking lot with a $700,000 adjusted basis for $200,000 cash and an apartment building with a $650,000 FMV. Her realized gain is $150,000 ($850,000 − $700,000). Because the $200,000 of boot received is more than the $150,000 of realized gain, only $150,000 of gain is recognized.
Like-Kind Exchanges - Property Transfers Involving Liabilities
For Example, Mary exchanges land with a $550,000 fair market value (FMV) that is used in her business for Doug’s building, which has a $450,000 FMV. Mary’s basis in the land is $400,000, and the land is subject to a liability of $100,000, which Doug assumes. Mary’s realized gain is $150,000 [($450,000 + $100,000) − $400,000]. Because assumption of the $100,000 liability is treated as boot, Mary recognizes a $100,000 gain.
Like-Kind Exchanges - Exchanges between Related Parties
For example, Melon Corporation, which is 100% owned by Linda, owned land with a basis of $200,000 that was held for investment. Linda’s brother Rick wanted to purchase the land for $900,000. Linda owned an office building with a basis of $750,000 and a FMV of $900,000. Instead of selling the land to Rick, Melon Corporation exchanged the land for Linda’s office building in December 20X3.
Two months later, Linda sells the land to Rick for $900,000. The exchange of the land for the office building is not a like-kind exchange because one of the related parties disposes of the property within two years of the exchange. In 20X4, Melon’s recognized gain on the exchange of the land is $700,000 ($900,000 - $200,000) and Linda’s recognized gain on the exchange of the office building is $150,000 ($900,000 − $750,000). Because Linda’s basis for the land is now $900,000, no gain is recognized on the sale of the land to Rick.
If Linda and Rick were not related, a like-kind exchange occurred in 20X4 and Linda’s gain on the sale of the land to Rick is $150,000 ($900,000 − $750,000). Of course, the exchange is not a like-kind exchange if Linda does not hold the land for investment or for use in her trade business after receiving it from Melon.
Transfer of Non-Like-Kind Property
- Shirley exchanges land with a $30,000 basis and marketable securities with a $10,000 basis to David for land with a $60,000 FMV in a transaction that otherwise qualifies as a like-kind exchange. The FMV of the marketable securities and the land surrendered by Shirley is $14,000 and $46,000 respectively. Because the non-like-kind property that Shirley transfers has a FMV greater than its basis, she recognizes $4,000 ($14,000 − $10,000) of gain. Shirley’s basis for the land received is $44,000 ($30,000 + $10,000 + $4,000), which is the basis of both the assets exchanged plus the gain recognized on the exchange.
- Paul exchanges timberland held as an investment for undeveloped land with a $200,000 FMV. Paul’s basis for the timberland is $125,000. His tractor with a $6,000 basis and a $4,000 FMV is also transferred. Because the non-like-kind property (that is, the tractor) that Paul transfers has a FMV less than its basis, he recognizes a $2,000 ($4,000 − $6,000) loss. Paul’s basis for the undeveloped land is $129,000 ($125,000 + $6,000 − $2,000).
- Paul recognizes a loss on the non-like-kind property he surrenders, despite receiving property in the aggregate with a FMV greater than the total adjusted basis of the transferred assets. Paul is actually making two exchanges. His exchange of timberland with a basis of $125,000 for undeveloped land with a $196,000 FMV is a like-kind exchange, but his exchange of the tractor with a basis of $6,000 for undeveloped land with a $4,000 FMV is a taxable exchange.
