1. Like-Kind Exchanges Chapter 2 pp. 39-68
2017 National Income
Tax Workbook™

2. Like-Kind Exchanges Qualifying like-kind propertypp
Qualifying like-kind property
Basis in property received
Gain/loss recognition (+ recapture)
Deferred/reverse exchanges
Related party exchanges
Exchange of personal residence

3. Like-Kind Exchanges Other real property interestspp
Other real property interests
Reporting a like-kind exchange
Structuring to allow gain/loss recognition
Learning Objectives: page 39

4. Qualifying Property
p. 40
Relinquished & acquired property must be held for
Investment or
Productive use in a trade or business
Not property that is:
Held primarily for sale
Security, certificate of trust, beneficial interest, partnership interest, debt
Personal-use asset

5. Qualifying Property Investment Property Unproductive real estate
Held by nondealer for future use or future realization of value increase
Passive holding > temporary period
Not primarily for sale

6. Qualifying Property Productive use in a trade or business
Active use in a trade or business
Retired property can retain character
Like-kind = same nature/character
Can differ in grade or quality
Personal property ≠ real property

7. Real Property Any real estate for any real estate, but
Time-limited interests may not qualify
Life estate of < 30 years ≠ remainder interest
Real estate lease ≥ 30 years = other real prop.
Real estate outside US ≠ real estate inside US

8. Personal Property Like-kind or like-class
Depreciable tangible like-class if
Same general asset class (Rev. Proc ) or
Same product class (NAICS)

9. Intangible Property Dependent on
Nature or character of the rights involved
Nature or character of underlying property
Goodwill/going concern of one business ≠ goodwill/going concern of another business

10. Basis of Replacement Property
Basis of property given up Less: FMV of boot received Plus: FMV of boot paid Plus: Gain recognized Less: Loss recognized

11. Basis of Replacement Property
Example 2.2
Truck given up: Adjusted basis = $2,500
Boot received: $200
Truck received: FMV $2,400
Gain taxed: $100 ( ,400 – 2,500)
Basis: Figure 2.1
$2,500 – = $2,400

12. Mixed Use Assets Basis for depreciation
Adjust basis of old asset as if 100% business
Basis for gain or loss
Use actual adjusted basis of old asset

13. Mixed Use Assets Example 2.3 - $28,000 truck, 75% businesspp
Example $28,000 truck, 75% business
Truck + $10,000 cash paid
Figures 2.2 and 2.3
Basis for Depreciation: $ 24,161
28,000 – 13,839 (100%) + 10,000
Basis for Gain or Loss: $ 27,621
28,000 – 10,379 (75% only) + 10,000

14. Mixed Use Assets Example 2.4 - $28,000 truck, 75% business
Gifted to son: A/B $17,621, FMV $20,000
Son trades truck & pays $10,000
Son’s basis in new truck: $27,621
§ 1245 recapture potential carries over to son

15. Boot Cash and non-like-kind property
Includes liabilities – net if given & received
Given: Causes loss to be recognized
Received: Causes gain to be recognized
FMV reduces basis, recognized gain increases
If boot FMV ≤ realized gain, no effect on basis
If boot FMV > realized gain, reduces new basis

16. Boot Received < Realized Gain
p. 44
Example 2.5
Van: $3,000 A/B, $5,000 FMV for
Truck: $4,200 FMV and $800 cash
$800 of $2,000 realized gain recognized
Basis in new: $3,000
($3,000 – )
$1,200 deferred gain

17. Boot Received > Realized Gain
p. 44
Example 2.6
Van: $3,000 A/B, $5,000 FMV for
Truck: $2,800 FMV and $2,200 cash
$2,000 of $2,000 realized gain recognized
Basis in new: $2,800
($3,000 – 2, ,000)
No deferred gain

18. Payment of Boot
p. 44
If boot is property, gain or loss on boot property recognized
Basis of new =
Basis of old + basis of boot given
Plus: Gain recognized
Less: Loss recognized
Deemed to receive FMV of boot given

19. Payment of Boot Example 2.7 Given: RE A/B $10,000, FMV $11,000
Stock A/B $ 4,000, FMV $2,000
Received: RE: FMV $13,000
$2,000 for stock → ($2,000) recognized
Basis in new: $12,000
($10, ,000 – 2,000)

20. Transfer of Liabilities
p. 45
Treated as receiving cash = debt given up
Net with debt received and cash paid
N/A debt given up < debt rec’d + cash pd.
Example 2.8
Given: Apt: A/B $400,000, FMV $880,000
Debt: $320,000

21. Transfer of Liabilities – Example 2.8pp
Daniel: Bldg: A/B $400,000, FMV $880,000
Debt: $320,000, $160,000 cash rec’d
Elene: Bldg: A/B $700,000, FMV $1M
Debt: $600,000
Figure 2.4 – p. 46
Daniel: $480,000 real’d, $160,000 recog’d
Elene: $300,000 real’d, $120,000 recog’d

22. Transfer of Liabilities – Example 2.9
Daniel sells building for $880,000
$320,000 mortgage paid off at closing
$560,000 to qualified intermediary
Purchases for $1M - $440,000 new debt
Debt given up less than debt received
$480,000 realized gain, -0- recognized
Basis: $400K – 320K + 440K = $520,000

23. §1245 Recapture Depreciable Personal Property
Ordinary income = the lesser of:
Recomputed basis of the property or
Excess of amount realized over A/B
Recomputed basis = A/B + dep. + amort.
Recog’d ord. gain if § 1031 not to exceed
Gain recognized under 1031 rules +
FMV of non-§1245 property received
Deferred ordinary gain carries over to new

24. §1245 Recapture – Example 2.10 New machine: old + $4,300 cash
Trade allowance: $1,360
A/B of old: $1,050 (5,000 – 3,950)
Realized gain - $310
Recognized gain (no boot received)
Recapture carries over to new machine

25. §1245 Recapture – Example 2.11 Old tractor (#1):
FMV $30,000, A/B $19,200 (50,000-30,800)
Received: New tractor (#2): FMV $25,000 + $5,000 cash
Figure 2.5
Recapture: $10,800 real’d, $5,000 recog’d
(lesser of $10,800 or 30,800 limited to $5,000)
Deferred gain: $5,800

26. Ex Figure Form 8824
p. 49

27. §1245 Recapture – Example 2.11
p. 51
No new basis - basis in new = basis in old
Depreciate over remainder of original period
Sells for $28,000 when A/B = $5,760
Realized gain: $22,240 (28,000 – 5,760)
Recapture: $13,440 #2 dep. + $5,800 of #1
§1231 gain: $3,000 (22, , ,800)

28. Depreciable Real Property §1250 Recapture
Ordinary income limited to greater of
Gain under like-kind rules + FMV of corporate stock bought as replacement property, or
Gain to report as ordinary from additional depreciation if transaction was cash sale less the FMV of depreciable real property received
Additional depreciation = excess of post-69 deprecation over SL depreciation

29. Depreciable Real Property §1250 Recapture
Example 2.12
Gave: FMV $112,000, $20,000 Add. Dep.
Rec’d: $2,000 cash + FMV $110,000
(Depreciable real: 15,000, Land: 95,000)
Ordinary income = $5,000 = greater of
$2,000 boot (like-kind recognized gain)
$5,000 (20,000 less 15,000)

30. Deferred Like-Kind Exchange
p. 52
Must have an exchange
No actual/constructive receipt of $ or other property by TP before replacement rec’d
Qualified intermediary sells old, buys new
Replacement property
Identified w/in 45 days of TP transfer
Received by earlier of 180 days after transfer or due date of return for year

31. Deferred Like-Kind Exchange Identification of Replacement
Written agreement to QI
Identify up to 3 properties - any value
Identify any # of properties if total FMV at 45 days is ≤ 200% FMV of old
If > 200%, treated as none identified unless acquired before 45 days or 95% FMV acquired w/in replacement period

32. Deferred Like-Kind Exchange Qualified Intermediarypp
Not the taxpayer or disqualified person
Exchange agreement to handle all actions
Disqualified person
TP’s agent, employee, accountant, attorney, banker, broker, real estate agent within 2 years of transfer
One related to TP or agent (use 10%)

33. Deferred Like-Kind Exchange Example 2.13
Fred has farm – FMV $800,000
Buyer has no property of interest
QI takes property and sells for $800,000
Fred finds $800,000 beach house in FL for rental activity
Identifies FL property to QI in 45 days
Informs of intent to acquire replacement

34. Reverse Like-Kind Exchangepp
Replacement acquired first
Safe harbor – Property held by QEAA:
Title held by an EAT subject to federal tax
At transfer to EAT, TP intends property to be replacement or relinquished for §1031
Written agreement w/in 5 days of transfer
W/in 45 days TP identifies replacement

35. Reverse Like-Kind Exchange
p. 54
Safe harbor – Property held by QEAA:
W/in 180 days after original transfer, transfer of replacement or relinquished
Combined time relinquished and replacement held by QEAA is ≤ 180 days
Example 2.14
Wants parcel B but has no buyer for parcel A, parks parcel B with EAT until sale of A

36. Related Party Exchange
Either disposes of property w/in 2 years → both must recognize deferred gain/loss
Recognized as of date of early disposition
Related:
§ 267(b) (limiting losses)
§ 707(b)(1) (limiting losses/controlled PS)
File Form 8824 year of exchange + 2 years

37. Related Party Exchange Example 2.15
Mother and son exchange land – 7/2016
Emily – A: FMV $100,000, A/B $60,000
Arthur – B: FMV $100,000, A/B $80,000
Arthur sells A in 4/2017 for $102,000
Gain to report in 2017
Arthur - $22,000
Emily - $40,000 (Basis in B = $100,000)

38. Related Party Exchange Early Disposition
No gain/loss on subsequent disposition if:
Disposition due to death
Disposition is an involuntary conversion
Can establish exchange & disposition not for tax avoidance
Ex – Arthur dies in 2017, spouse sells
Emily does not recognize deferred gain

39. Related Party Exchange Early Disposition
Practitioner Note: IRS Accepted Reasons
Disposition was nonrecognition transaction
Related parties derived no tax advantage from shifting basis between properties
Exchange resulted in each holding either
The entire interest in a single property or
A larger undivided interest in any of the properties

40. Related Party Exchange Tax Avoidance Purposepp
Use of an unrelated party to circumvent related party rule → § 1031 N/A
Prearranged plan
TP transfers to unrelated party
W/in 2 years unrelated exchanges with party related to TP

41. Related Party Exchange Tax Avoidance Purpose – Ex. 2.17
Father and daughter
Cathy – A: FMV $200,000 A/B $ 50,000
Ken – B: FMV $200,000 A/B $200,000
Cathy wants B, local hospital wants A
A transferred to QI, QI sells A to hospital
QI buys B from Ken, transfers to Cathy
QI use circumvents rules - $150,000 taxed

42. Exchange of Personal Residencepp
No like-kind exchange for personal use
Investment motive on residence irrelevant
Moore V Commissioner
Starker v US
Vacation home if primarily rental o.k.
Safe Harbor – Rev. Proc

43. Safe Harbor – Rev. Proc 2008-16 4-Year Test
TP owns for ≥ 24 months before exchange
During month periods preceding, TP
Rents out at FRV for 14 days or more
TP’s use does not exceed the greater of 14 days or 10% of FRV rental days
During month periods following, TP meets the same two tests for new property
Exchanges on or after 3/10/2008

44. Ownership in Trust
p. 57
Real estate exchanged for beneficial interest in a trust – very limited exception
Rev. Rul – grantor trust
Trustee only income collection/distribution
Trustee limited in property transactions
Trustee distribute all cash proportionately
Exchange of RE for interest in Delaware statutory trust qualifies as LKE

45. Other Real Property Interests Easements
If real property by state law, can exchange
Supporting revenue rulings p. 58
Example 2.18 – 100 acres farmland
Conservancy to buy permanent easement
TP locates apartment building he wants
Exchange qualifies

46. Other Real Property Interests Timberlandpp
Qualifies as real property interest
§ 194 deductions may be recaptured
Not qualified (personal property):
Right to cut/remove standing timber under deed or contract
Timber that has already been cut/removed

47. Other Real Property Interests Leasehold Interest
Nondealers may exchange for real property
Leasehold of a fee with ≥ 30 years to run
Optional renewals added in
< 30 years may be like-kind with other short-term leaseholds
Ltr. Ruling : office leaseholds qualified

48. Other Real Property Interests Fractional Interestpp
Tenants in common – undivided fractional interest (UFI) can qualify
Stock or partnership interests do not qualify
Tenants in common could be partnership if services provided to lessees
Rev. Proc – 15 conditions for IRS ruling whether UFI in rental real is not an interest in business entity (pp )

49. Other Real Property Interests Undivided Fractional Interest
Ltr Ruling
Was a UFI in rental real estate qualified?
Property managed by agent
Leased on a triple-net-lease basis
An owner could sell interest separately
Could partition property to sell to coowners
Interest not a business entity - qualified

50. Reporting Exchange of Personal Property: Ex. 2.19pp
Gave: FMV $5,000 A/B -0- , Cash $15,000
Received: FMV $20, Figure 2.8

51. Reporting Exchange of Real Property: Ex. 2.20pp
Gave: FMV $2M, A/B $100,000, $7,500 tax
Received: FMV $1.5M, $500,000 cash Fig. 2.9

52. Installment Sale If installment obligation received
p. 65
If installment obligation received
Reduce contract price by FMV of like-kind property received
Reduce gross profit by any deferred gain
Like-kind property is not a payment
Complete 8824 to determine gain recognized
Complete 6252 to determine gain to report

53. Installment Sale – Example 2.21pp
Installment note: $100,000/yr – Same 8824
Figure 2.10 Form 6252– p. 66

54. Structuring for No §1031 May want to recognize gain
p. 67
May want to recognize gain
Sale price > original cost, 1231 cap. gain
Increased basis in new property
Greater depreciation, less SE tax
Gain to offset expiring NOL
Must make outright sale, then purchase
Separate and independent transactions

55. Structuring for No §1031 – Ex. 2.22pp
Old: $45,000 cost, all § 179 expensed
New: $20,000 trade + $50,000 cash
Tax savings if no §1031: $2,826
TRADE
SELL & PURCHASE
TAX EFF
Ord Gain
-0-
$20,000
$3,000
Basis
$50,000
$70,000
Dep Exp
(14,565)
(20,391)
Net Tax
(17,391)

56. Questions?