Tax Consequences Like Kind Exchanges and Disposition Property Flashcards
Reporting Requirements
Section 1031
no gain or loss recognized on certain exchanges
defers gain/loss
substitute basis rules apply
Qualifying Property
real estate machinery equipment office furniture computers real and personal property that would be used for income producing or investment purposes
Like-Kind
same in nature or character
may differ in quality
livestock of different sexes not like/kind
personal property in different countries…not like kind
real property is like kind unless outside US
To Qualify:
- must be like kind
- both must be used in trade or business
Example: Apartments complex for shopping center (real estate)
No inventory
No Principle residence
Liabilities
Assumes mortgage and is relieved of mortgage only NET debt relief is BOOT
Boot
Cash or other property in like-kind exchange that is not part of exchange but makes value of exchanges equal.
Party receiving boot must recognize gain = lesser of
- boot
- realized gain
ONLY NEED 3 NUMBERS
- FMV of property received
- Adjusted basis of property given up
- Boot (given or received but not both)
Party 1. FMV + Boot Received + Liability assumed by other = Gain Realized
Party 2. FMV Liability Assumed + Boot Given + FMV Never Used = Given
Difference is realized
Recognized is lesser of boot received or realized gain
adjusted BASIS NEW property=
REALIZED- RECOCOGNIZED (SUBSTITUTE BASIS)
Time Limits like kind
New Property to be received must be identified with in 45 days after transfer
must be received with in 180 days after transfer
Related Party Transaction
if property in related party like kind exchange is sold within two years the gain not recognized is realized on date of sale.
Capital Gains
- Short term cap gains and losses are netted
- Long term gains and losses are netted
- Any gains and losses that remain are netted
- If loss remains, only $3000 of net losses can be used to offset ordinary income in any one year
- Remainder is carry forward
Gains
LTCG - 10%-15% bracket = 0%
25%-35% 15%
39.6% 20%
STCG - ordinary income rates
Long term collectables - 28%
Real 1250 Property -
10-15% brackets 0%
25%- 35% 15%
39.6% 20%
Depreciation Recapture 25% when sold (5 and 7 yr)
Investment Interest
treasuries, GNMA, zeros, purchase mortgage
Sale of Mutual Fund Shares
Gain or loss is determined by sale price - basis Basis = 1. FIFO 2.Specific Lots 3. ACSC
Sale of Residence
Gain excluded
MFJ $500k
S $250
(can take this and like kind deferral if primary residence and then rent)
both spouses must have owned and used 2 out of 5 yr period
If entire gain excluded…not reported at all
Schedule D
does not matter if gain is reinvested in new home.
Partial Exclusion unforeseen circumstances
- Divorce, separation or death (sale within 2 years death of spouse…full step exclusion)
- eligible unemployment
- change in employment for worst
- multiple births same pregnancy
- damage natural disaster, war, terrorism
- condemnation seizure, foreclosure
- job related move 50 mi further away
1 yr/5 50%
Depreciation Recapture
1245
no residential or real property (27.5 and 39 year class)
mostly equipment.
Business takes depreciation on machinery CRD
cost recovery deduction.
When sell must do:
1. look back and recapture lesser of total CRD taken or gain realized as 1245 ordinary gain
- recover any excess 1231 capital gain
Original Cost
-CRD
=Basis
Sale price
-Basis
=Gain
Recognize lesser of CRD or gain 1245 OI
excess gain is CG 1231 (whatever not depreciable)
Gain -CRD
1231 Property
depreciable tangible property
intangible personal property
real property
Tangible Personal Property Recapture
Installment Sale
Fully depreciated- All depreciation recapture must be reported as income in the year of disposition.
