BA 128A-1 3/29 Questions from lecture Review Chapter 12 Assignment I12-28,29,40,43 Additional assignment I2-26,42,46

Nontaxable Exchanges for property transactions Three types –Like-kind exchanges –Involuntary conversions –Sales of a personal residence

Like-kind exchange Only applied to assets held for –production or use in trade/business –investment purposes Non recognition of gain or loss is mandatory if qualified –like-kind - real property vs. real property, real property outside US <> real property in the US, personal property - within same general asset class e.g. furniture and fixtures, automobiles. (like-classes) Each property can only have 1 general asset class –What does not have like classes - intangible personal property, non depreciable personal property or personal property held for investments –direct exchange What is not like-kind –securities or inventory –except common stock of same corporation - preferred vs. common stock of same corporation not like-kind –personal use assets

Like-kind exchange (cont) Non-simultaneous exchange - OK if completed within a specified time period (exchange identified within 45 days and property received the earlier of 180 dyas after property is transferred or the due date for filing a return Realized vs. recognized Boot received - gain is recognized to the extent the boot is received but not greater than the amount realized Liabilities assumed by purchased party is considered cash received by taxpayer. If both parties assumed liabilities, the difference between liabilities assumed is the boot Basis of property = Basis of property exchanged - boot received + gain recognized - loss recognized Related party transactions- 2 year rule Non like-kind property - recognized difference between FMV and adjusted basis Holding period - capital asset - use exchanged property’s holding period, boot property - date of exchange

Involuntary conversions Election basis, applies only to gains - deferral, not losses Basis of replacement property = property’s cost reduced by amount of gain deferred Definition- theft,seizure,condemnation, destruction Replacement period - from date of involuntary conversion to 2 years after the end of the tax year when the gain is realized; for condemnation - 3 years If replacement property cost < amount realized, gain must be recognized holding period = replaced property holding period

Involuntary conversions Severance damages - compensation for decline in value, analogous to proceeds of property insurance, amount received reduces basis of property Replacement property - similar or related in service. Use functional test except taxpayer use test for own and leased property and like-kind property for condemnation of business/trade/investment property

Sale of principal residence Exclusion of gain. $250,000 for single, $500,000 for married filing jointly Determined on individuals basis One exclusion every two years –exception - part of the gain may be excluded if sale/exchange is due to a change of employment, health or unforeseen circumstances, see e.g. I2-59 Principal residence - use most of the time Selling expenses increase adjusted basis Involuntary conversion treated as sale, exclusion rule and deferral rule both apply, functional test used for replacement property Presidential Declared Disaster after 8/31/91, gain from receipt of insurance proceeds is excluded

Tax planning considerations Nontaxable like-kind exchange –need to offset capital loss with capital gain –deferred gain reduced basis, no depreciation recognized Almost always want to use the sale of principal residence to exclude gain Election to defer gain for involuntary conversion - tax rate and capital loss offset, non-recognition is mandatory if property is directly converted into similar property