Taxes: Like-Kind Exchanges & Involuntary Conversions

Question 1

Taxes
Like-Kind Exchanges & Involuntary Conversions
Like-Kind Exchanges Overview

Answer 1

Like-Kind Exchanges

• deferral if no significant economic change
• Losses are never recognized from like-kind exchange
• Recognized Gain lesser of:
  
  • realized gain
  • boot received
• Rules are Mandatory and Not Elective
• Qualifying Property
  
  • only business and investment property
  • not inventory or receivables
  • must be “like-kind” property
  • all realty is considered “like-kind”
  • personalty must be within same asset class
  • business property can be exchanged for investment property
  • 1 inside and 1 outside US is not “like-kind”
  • special rules for related taxpayers
• holding period tacks onto like-kind property received.

Question 2

Taxes
Like-Kind Exchanges & Involuntary Conversions
Like-Kind Exchanges & Boot Received

Answer 2

Like-Kind Exchanges & Boot Received
- cash and not “like-kind” property are boot
- mortgage received is boot to extent > mortgage given
- Boot does NOT cause realized losses to be recognized
- Basis Computation:
FMV property received
- postponed gain
+ postponed loss
= Basis of “like-kind” property
* basis of not “like-kind” property received is FMV*

Question 3

Taxes
Like-Kind Exchanges & Involuntary Conversions
Involuntary Conversions Overview

Answer 3

Involuntary Conversions Overview
- rules are elective
- involuntary conversion of property resulting in a realized gain (only) is eligible for deferral
- NOT LOSSES
- gain generated because asset is destroyed, stolen, or condemned (taken by government)
- may elect if proceeds are reinvested in similar property within reasonable time
- not just business property, everything
- replacement property
- must be similar
- made within TWO YEARS from the END of tax year in which generated
- extended to 3 years for condemned business realty
Calculation of Gain
- adjusted basis is cost - any deferred gain
- holding period of old carries over

Question 4

Taxes
Like-Kind Exchanges & Involuntary Conversions
Involuntary Conversions Calculation

Answer 4

Involuntary Conversions Calculation

amount realized from conversion
- adjusted basis of old property
= realized gain/loss

amount realized from conversion
- cost of replacement property
= recognized gain, limited to realized gain