REG: Like-Kind Exchanges and Involuntary Conversions

Question 1

A heavy equipment dealer would like to trade some business assets in a nontaxable exchange. Which of the following exchanges would qualify as nontaxable in 2018?

The company jet for a large truck to be used in the corporation

Investment securities for antiques to be held as investments

A road grader held in inventory for another road grader

A corporate office building for a vacant lot

Answer 1

A corporate office building for a vacant lot

An exchange will be non-taxable if it qualifies under the like-kind exchange rules. All realty is considered like-kind property. Since the building and the land are both realty, this qualifies as a non-taxable like-kind exchange.

Question 2

Dawson, Inc.’s warehouse (with an adjusted tax basis of $75,000) was destroyed by fire. The following year, Dawson received insurance proceeds of $195,000 and acquired a new warehouse for $167,000. Dawson elected to recognize the minimum gain possible. What is Dawson’s basis in the new warehouse?

$47,000
$75,000
$139,000
$167,000

Answer 2

$75,000

A fire qualifies as an involuntary conversion, and realized gain can be deferred since the old warehouse is replaced with a new warehouse.

Amount realized from conversion $195,000
Adjusted basis of old property (75,000)
Realized gain $120,000

Amount realized from conversion $195,000
Cost of replacement property (167,000)
$ 28,000

The recognized gain is $28,000, the lower of the realized gain or the amount realized that was not reinvested in the new warehouse. The deferred gain is $92,000 ($120,000 – $28,000).

The adjusted basis of the new property is its cost reduced by any deferred gain: $167,000 - $92,000 = $75,000.