Chapter 12 Property Transactions

Chapter 12 Property Transactions - Chapter 12 Property...

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Chapter 12 Property Transactions Taxpayers who sell or exchange property for an amount greater or less than their basis in that property have a realized gain or loss on the sale or exchange. Like-kind exchange o Section 1031 provides that “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business 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 trade or business or for investment” o Both the property transferred and the property received must be held either for productive use in the trade or business or for investment. o Section 1031 is not an elective provision if it qualifies as a like-kind exchange, nonrecognition of gain or loss is mandatory. o To be nontaxable exchange under sec. 1031 the property exchanged must be like-kind. o Like-kind refers to nature or character of the property and not its grade or quality. o Exchange of real property qualify even if the properties are dissimilar. o Location of the property Transfers of real property located in the U.S. and real property located outside the U.S. after July 9, 1989 are not like-kind exchanges. Exchanges of personal property predominantly used in the U.S. and personal property used outside of the U.S. that occur after June 8, 1997 are not like-kind exchanges. To determine where the property is predominantly used, the two-year period ending on the date the property is exchanged is analyzed. For property received, the location of predominant use is determined by analyzing the use during the two-year period after the property is received. o Property must be the same class Exchange is not a like-kind exchange when property of one class is exchanged for property of a different kind or class. Ex. If real property is exchanged for personal property no like-kind exchange occurs. o Property of a like class The treasury regulations provide that personal property of a like class meets the definition of like- kind. (page 12-3)
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If the properties are in a general assets class the properties may not be classified within a product class. There are no like classes for intangible personal property, nondepreciable personal property, or personal property held for an investment.
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