1. Property Transactions:
Chapter 12
Property Transactions:
Nontaxable Exchanges 1

2. Learning Objectives
Understand the tax consequences arising from a like-kind exchange
Determine the basis of property received in a like-kind exchange
Determine whether gain from an involuntary conversion may be deferred
Determine the basis of replacement property in an involuntary conversion
Determine when a gain resulting from sale of principal residence may be excluded 2

3. Like-kind Exchanges Like-kind Property Defined
Refers to nature and quality
Same class
Personal property for personal property
Real property for real property
Certain properties do not qualify for like-kind exchange 3

4. Like-kind Exchanges A Direct Exchange Must Occur
Direct exchange not a conversion into proceeds with a subsequent purchase
Certain interdependent transactions may receive exchange treatment
Three-party exchange 4

5. Like-kind Exchanges Three-party Exchanges
Three parties may be involved in a simultaneous or non-simultaneous like-kind exchange
Finding a suitable exchange property may be difficult 5

6. Like-kind Exchanges Receipt Of Boot
Gain is recognized to extent of boot received, limited by realized gain
Loss is never recognized
Boot is any non-qualifying property
Mortgages are offset to determine if there is net boot 6

7. Like-kind Exchanges Basis Of Property Received
Basis of property given up less boot received plus gain recognized
Basis of non-qualifying property (boot) is the property’s FMV 7

8. Like-kind Exchanges Exchanges between related parties
Transfer of non-like-kind property
Holding period 8

9. Involuntary Conversions Involuntary Conversion Defined
Includes theft, seizure, requisition, condemnation, or destruction of property
Gains arise when insurance or government proceeds exceed the property’s adjusted basis
Severance damages 9

10. Involuntary Conversions
Tax treatment of gain due to an involuntary conversion directly into similar property
Replacement property 10

11. Involuntary Conversions
Obtaining replacement property
Taxpayer must purchase the replacement property
Time requirements
Normal replacement period is 2 years after the end of the first taxable year
Property held for use in trade or business can be replaced within 3 years after the end of the tax year 11

12. Sale Of Principal Residence12

13. Sale Of Principal Residence
Principal residence defined
Taxpayer has only one principal residence
It can be condo, houseboat, or house trailer
If taxpayer owns multiple residences, facts and circumstances on a case by case basis 13

14. Sale Of Principal Residence
New exclusion applies to sale of principal residence that has been occupied at least two years of the five year period before the sale
Must satisfy the ownership and use tests 14

15. Sale Of Principal Residence
Excluded gain
Up to $250,000 per individual taxpayer
$500,000 for married filing jointly 15

16. Sale Of Principal Residence
Sale of more than one principal residence within two-year period
A portion of gain be excluded
If due to employment, health or unforeseen circumstances
Based on ratio

17. Sale Of Principal Residence
Involuntary conversion of a principal residence may be handled under the involuntary conversion or the principal residence rules 16

18. Tax Planning Considerations17

19. Compliance And Procedural Considerations18

20. Compliance And Procedural Considerations
Involuntary conversions
Reporting sale or exchange of principal residence
Gain reported on Schedule D 19