UNIT 7 Flashcards

1
Q

Form 8824 usage

A

-Required in the year of the exchange.
-For exchanges between related parties, filing required for two additional years.

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2
Q

Information needed for form 8824

A

-Description of property received and exchanged.
-Calculation of substituted basis in new property.
-Related party information, if applicable.

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3
Q

Qualifying Transactions (like kind exchange)

A
  • Applies to IRC section 1231 property.
    • Includes property held for income production or used in a trade or business.
    • Only realty exchanges for realty are considered qualifying after recent tax code changes.
    • Like-kind property refers to the same nature or character, not necessarily the same quality.
    • Example: Exchange of raw land for an apartment building is acceptable.
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4
Q

Property identification (like kind exchange)

A

Must be identified in a written agreement within 45 days after surrendering the transferred property.

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5
Q

Could you exchange raw land for an apartment building (like kind exchange)

A

Yes - Like-kind property refers to the same nature or character, not necessarily the same quality.

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6
Q

When must you receive property? (like kind exchange)

A

Get the new property within 180 days after giving away the old one or by the tax return deadline (with extensions) for the year you gave away the old property.

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7
Q

Non qualifying property

A
  • Anything that’s not real estate
  • Livestock
  • Inventory or items for sale
  • Intangible assets like stocks, bonds, and partnership interests
  • Real estate outside the United States
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8
Q

Non qualifying property is treated as what

A

BOOT

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9
Q

Liabilities (like kind exchange)

A
  • Liabilities may be assumed in a like-kind exchange.
  • Assuming debt is like getting cash (boot) and could be taxable.
  • If liabilities are swapped, the one relieved of more debt than assumed gets boot.
  • Transferring assets reduces gain, while transferring liabilities increases it.
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10
Q

Boot

A
  • Non-qualifying property is treated as boot.
  • Receiving cash is automatic boot.
  • Only debt relief greater than debt assumption is boot.
  • Example: If one party adds something extra (like a copy machine) in an exchange, it’s boot for the other party.
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11
Q

Related party transactions

A
  • Related party transactions are allowed under §267 but with restrictions.
  • Related persons include spouse, child, grandchild, parent, sibling, or if the taxpayer owns more than 50% of the stock (corporation) or interests in partnerships or LLCs.
  • If either property is disposed of within two years of the exchange, like-kind tax treatment is disallowed, and deferred gain is recognized immediately by both parties.
  • Exceptions are granted for dispositions due to death or involuntary conversions.
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12
Q

Calculation of a Like-Kind Exchange

A
  • Amount Realized: Fair Market Value (FMV) of qualifying property received, plus or minus net boot.
  • Gain Realized: Amount realized minus the basis of the property transferred away.
  • Gain Recognized: Lesser of gain realized or net boot received.
  • Deferred Gain: Gain realized minus gain recognized.
  • Substituted Basis: FMV of qualifying property received minus deferred gain. Alternatively, it can be calculated by adding net boot given away to the basis of the old property.
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13
Q

John Appleton wants to exchange his farm for a Bed and Breakfast owned by Martha Shelby. John’s farm has a FMV of $680,000, an adjusted basis of $200,000, and is subject to a $120,000 mortgage. Martha’s B&B has a FMV of $800,000, with an adjusted basis of $400,000, and is debt-free. In the exchange, Martha will assume John’s mortgage. To help equalize the exchange, John is including farm equipment worth $150,000, and will also pay Martha $90,000 in cash.

What is the gain recognized and the substituted basis in the newly acquired properties for each taxpayer?

A
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14
Q

What is automatic boot?

A

receiving cash

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15
Q

Debt relief greater than what is boot?

A

debt assumption

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15
Q

Boot example

A

If one party adds something extra (like a copy machine) in an exchange, it’s boot for the other party.

16
Q

Can you assume liabilities in a like kind exchange?

A

Liabilities may be assumed in a like-kind exchange.

17
Q

Assuming debt in a like kind exchange is like what and treated how?

A

Assuming debt is like getting cash (boot) and could be taxable.

18
Q

If liabilities are swapped, who gets boot?

A

If liabilities are swapped, the one relieved of more debt than assumed gets boot.

19
Q

In a like kind exchange, transferring assets does what?

A

reduces gain

20
Q

In a like kind exchange, transferring liabilities does what?

A

increases gain

21
Q

Related parties under under §267 include

A

spouse, child, grandchild, parent, sibling, or if the taxpayer owns more than 50% of the stock (corporation) or interests in partnerships or LLCs.

22
Q

Like Kind Exchange Amount Realized

A

Fair Market Value (FMV) of qualifying property received, plus or minus net boot.

23
Q

Like Kind exchange gain realized

A

Amount realized minus the basis of the property transferred away.

24
Q

Like kind exchange gain recognized

A

Lesser of gain realized or net boot received.

25
Q

Like kind exchange deferred gain

A

Gain realized minus gain recognized.

26
Q

Like kind exchange substituted basis

A

Substituted Basis: FMV of qualifying property received minus deferred gain. Alternatively, it can be calculated by adding net boot given away to the basis of the old property.

27
Q

If either property is disposed of within 2 years of the exchange, what happens to the like-kind tax treatment?

A

If either property is disposed of within two years of the exchange, like-kind tax treatment is DISALLOWED, and deferred gain is recognized immediately by both parties.