Tax Consequences of Like Kind Exchanges and Disposition of Property

Question 1

Like kind exchange - Reporting requirements

Answer 1

• deferring unrecognized gain or loss because substitute basis rule applies to the properties that are swapped in the exchange

Question 2

1031 reporting

Answer 2

• no gain or loss will be recognized on the exchange of certain properties held for either an investment or for productive use in a trade or business
• like kind exchanges

Question 3

Qualifying property

Answer 3

• real estate

Question 4

Like kind property

Answer 4

• of same nature even if they differ in grade or quality
• regardless of improved or unimproved
• cannot have one inside US and one outside US

Question 5

1031 Conditions

Answer 5

both conditions must be met
- the exchange properties must be like kind
- the taxpayer must use the acquired property in a trade or business

Question 6

Liabilities

Answer 6

• if taxpayer assumes and also relieved of a mortgage, net debt is considered boot

Question 7

Boot

Answer 7

• property with lower value must add consideration in addition to swapped property
• cash or other (non like kind) property will be involved in the exchange
• party receiving boot must recognize a portion of the realized gain equal to the lesser of the boot or the realized gain

Question 8

Like kind exchange calculations

Answer 8

Use 3 numbers only
1. FMV of property received
2. Adjusted basis of property given up
3. Boot

3 possible calculations
1. Realized gain (gain at time of transaction)
2. Recognized gain (part immediately taxable)
3. Substitute basis of property acquired

Question 9

Calculation 1 - Realized gain (at time of transaction)

Answer 9

Realized gain = total value received (FMV + Boot) - adjusted basis of property given up

Question 10

Calculation 2 - Recognized gain (realized immediately)

Answer 10

Recognized gain = lessor of realized gain (calc 1) or boot received (not given, received)

Question 11

Calculation 3 - Substitute basis

Answer 11

Substitute basis = FMV of property acquired - (realized gain - recognized gain)

Question 12

Time limit on like kind exchanges

Answer 12

• like kind treatment barred if property to be received is not identified on or before 45 days after the transfer and/or acquisition property title isn’t received within 180 days after transfer

Question 13

Related party transaction

Answer 13

• within 2 years, other taxpayer disposes of property they received from you in the exchange, the gain not recognized in the exchange is recognized on the date of the sale

Question 14

Capital gain/loss - disposition of securities

Answer 14

• STCG and STCL are netted
• LTCG and STCG are netted
• if any gain or loss remains they are netted
• if a loss remains, only 3k can be used to offset ordinary income in a single year

Question 15

Rates and brackets for LTCG and qualified dividends after TCJA

Answer 15

0%, 15%, 20% rates with own bracket separate from marginal bracket

Question 16

Rates and brackets for STCG

Answer 16

• taxed at ordinary rate
• LT collectibles subject to 28% rate
• real property (1250) at capital gains rates
• special 25% depreciation recapture rate is applied when sold
• 3.8% net investment income tax applies to high earners

Question 17

Tax implication on the sale of mutual fund shares

Answer 17

sales price - basis
3 methods to determine basis
- FIFO, shares acquired first sold
- specific identification, identify which shares to sell
- average cost, divide total cost of all shares held by number of shares sold

Question 18

Sale of residence (Code section 121)

Answer 18

• enables taxpayers to exclude from income substantial amounts of capital gain on sale of their homes
• MFJ realized gain exclusion is 500k
• both must have owned and lived in residence for 2 out of 5 year period immediately preceding homes date of sale
• if gain is entirely excluded, the transaction is not reported on taxpayers return at all
• if over exclusion, report on sched. D as capital gain

Question 19

Short of 2 out of 5 year minimum

Answer 19

• exceptions to still qualify
  partial exclusion allowed for
• move required by change of employment, health reasons, unforeseen circumstance
• size of partial exclusion depends on how long the seller lived there
• 1 year : 50% exclusion

Question 20

Unforeseen circumstances allowing partial exclusion on CG home sale

Answer 20

• divorce, legal separation, death
• unemployment compensation
• change of employment makes it impossible to pay mortgage
• multiple births from same pregnancy
• damage to home due to war, terror, natural disaster
• condemnation, seizure, foreclosure
• job related move more than 50 miles from old home

Question 21

1245 property

Answer 21

• depreciation recapture may apply to all MACRS property other than residential real property (27.5 year) and nonresidential (39 year)
• when business purchases equipment and takes depreciation, the cost recovery deduction offsets the business’s ordinary income

when business sells equipment for gain, must do following
1. look back and recapture the lesser of total CRD taken or gain realized as 1245 gain (ordinary income)
2. recover any excess gain as 1231 (capital gain)

Question 22

Installment sale recapture

Answer 22

• if installment sale of tangible property is used, all depreciation recapture must be reported as income in year of disposition
• major disadvantage

Question 23

Related parties

Answer 23

• like kind exchange an installment sales are subject to related party rules
• when taxpayer exchanges like kind property with related taxpayer and within two years the related party disposes of the property, any gain not recognized in exchange is recognized on date of sale

Question 24

Wash sale rule

Answer 24

• no loss deduction is allowed for any loss of stock if within a period beginning 30 days before and after sale the taxpayer acquires substantially identical stock or securities

Question 25

Charitable bargin sales

Answer 25

• if charitable deduction is available, the basis of the property sold to the charity for less than fair market value must be allocated between the portion of the property sold and the portion given to charity
• based on FMV of each portion

(proceeds / FMV) * basis = adjusted basis

proceeds - adjusted basis = taxable gain