Chapter 12

Chapter 12 - Chapter 12 There are three common transactions...

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Chapter 12 There are three common transactions that result in nonrecognition of a realized gain or loss: 1. life-kind exchanges S. 1031 (deferred gain/loss) 2. involuntary conversions S. 1033 (deferred gain) 3. Sales of a personal residence S. 121 (excluded gain) Sec 1031(a) provides that “no gain or loss shall be recognized on the exchange of property held for productive use in a T or B or for investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a T or B or for investment. (Not an elective decision) Like-Kind Property Defined: Character: must be like kind, refers to the nature or character of the property and not to its grade or quality Location of the property: have to both be located within the US Property must be in the same class: for example is real property is exchanged for personal property, no like-kind exchange occurs Property of a life class: personal property of a like class meets the definition of like-kind. Like class property is defined as depreciable tangible personal properties within the same General Asset Class or within the same Product Class. An exchange of inventory or securities does not qualify as a like kind exchange. However Sex 1-36 provides that no gain or loss is recognized on the exchange of CS for CS or preferred stock for preferred stock in the same corporation. To qualify for a life kind exchange, a direct exchange of property must occur, thus the sale of property and then purchase does not qualify Three party transactions: this can be an effective way to allow taxpayer to consummate a like kind exchange A nonsimultaneous exchange is treated as a like kind exchange if the exchange is complete within a specified time period (45 days IDed and 180 days to be received) Receipt of Boot: Taxpayers who want to exchange property do not always own property of equal value, so to complete the exchange non like kind property or money may be given or received. Cash and non like kind property constitute boot. Gain is recognized to the extent of boot received but may not exceed the realized gain and will not cause a realized loss to be recognized. If a liability is assumed, the amount of the liability is considered money received by the taxpayer on the exchange. If each party assumes a liability of the other party, only the net liability given or received is boot
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Basis of property received: Like kind property received: basis of property exchanged – boot received + gain recognized – loss recognized. Can also be compute by subtracting the unrecognized gain from its FMV or by adding the unrecognized loss to its FMV Non like kind property received: the basis of non like kind property received is an amount equivalent to its FM at the date of the exchange. The basis of boot is FMV at time of exchange
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Chapter 12 - Chapter 12 There are three common transactions...

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