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Unformatted text preview: CHAPTER 11 1. Introduction a. b. We previously covered realized gains and losses:
i. Amount of realized gain/loss is calculated by comparing FMV property received
v. adjusted tax basis of property given up
ii. Realized gain/loss is recognized unless there is a provision for nonrecognition
i. Exclusions (e. g., sale of personal residence — recent law: PERMANENT)
ii. Deferrals (e. g, 1031 exchange) (adjustment to basis: TEMPORARY) 2. Possible Exclusion of Gain on Sale of Principal Residence a. .0 1"? 2*?qu Qualifying individual.
i. Owned and occupied as a principal residence for at least last 2 of 5 years before the sale (home in which TP lives; must look at all the facts and circumstances).
Exclusion applies to only one sale or exchange every 2 years.
Exclude up to $250,000 of gain from sale of a principal residence. Exclude up to
$500,000 if married and ﬁling joint return, if: i. Either spouse meets the ownership test;
ii. Both meet the E test; and,
iii. Neither is ineligible (i. e., because he/she sold or exchanged a residence with last 2 years).
Widowed TP’s period of ownership includes period deceased spouse owned and used
Exclusion may be prorated if TPs don’t meet the above requirements AND certain
conditions exist (i.e., the must move for work, health issues, or certain “unforeseen
circumstances” — see page 11-5).
May need to recapture some of the gain if depreciation was taken (e. g. , home was also
used for ofﬁce) (importance of good records) (recaptured gain would be taxed at 25%).
Compare to old deferral law (Section 1034) (could a TP prefer old rules?)
TP may elect out of the nonrecognition — but why?
Keep 1014 stepped up basis in mind if very large potential gains
Potential reduction of exclusion for certain “non-qualifying” use starting in 2009 (e. g. ,
even if a TP passes ownership and use test he/she may still have a % of the otherwise gain NOT eligible for exclusion as a result of renting out the property after January 1,
2009) 3. Like-Kind Exchanges (Section 1031!: properties held for productive use in a T or B or for
investment (NOT inventory, stocks, property held for personal use, etc.) may trigger a
MANDATORY nonrecognition of G/L. a. b. Like kind if same nature or character (do NOT look to grade or quality):
i. Generally, real property for real property
ii. Some personal property for personal property (same general “asset class” as indicted by
Rev. Proc. 87-56). Some examples (on page 11-9):
1. Ofﬁce furniture, ﬁxtures, and equipment
2. Info systems (e.g., computers/peripheral equipment)
3. Autos 4. Light general purpose trucks
Why no tax? 0. Also, some three-party exchanges can effect a tax-free exchange for a party where cash is
obtained by one of the other parties (but, TP seeking nonrecognition must, among other things,
NOT receive or control the $ and the TP must satisfy both a 45 day “identiﬁcation” deadline
and a 180 day acquisition deadline) (See page 11-15) (1. Mandatory non-recognition may create unwanted consequences e. Exchanges NOT solely in-kind: i. Realized gain will be recognized to extent of cash or other non-like property received
by the transferor (and liabilities/debt that is assumed by transferee).
ii. Loss on like-kind exchange for the like property given is not deductible — exchange just
gives the new/acquired like property a higher basis (even if that BASIS > FMV!)
iii. However, loss could be recognized on non-like property (i.e., non-cash boot) M as
part of the deal and that property (A) was not personal use property and (B) had a FMV
less than its adjusted basis (See example 11.23).
iv. Compare sale of certain residences (exclusion) to this deferral.
1. Why is Boot treated differently?
2. What is the reason for like-kind exchange non-recognition? (No artiﬁcial
losses? No change in economic condition? No available cash?) (Also, non-
recognition in like-kind exchange is just a deferral) BASIS OF ACQUIRED (“NEW”) PROPERTY METHOD 1: Basis in “new” property = Adjusted basis of property given: + Gain recognized + Boot given (and liabilities assumed by transferor) — Loss recognized — Boot received (and liabilities assumed by transferee) 0R: METHOD 2: Basis in “new” property = FMV of like-kind property received: — Deferred gain + Deferred loss (Method 2 highlights how deferred gain/loss is only temporary through an “artiﬁcial ” basis
adjustment) f. Holding Period of non-boot property acquired generally includes holding period of property given (but,
holding period for boot property begins on date received) Involuntagy Conversions (Section 1033): Casualty, theft or condemnation (or threat of
condemnation) may give TP the opportunity (via an election) to defer a gain provided qualifying replacement property is timely acquired (basis of the “new” property would be
cost of replacement property LESS the deferred gain — Example 11.38). However, some mandatog rules:
a. No gain will be recognized if direct conversion of property into similar property (i. e.,
instead of money) (see Example 11.35).
b. If there is a realized loss, the loss must be recognized (see Example 11.36).
i. Unless condemnation of personal use asset (see Example 11.37); But, a personal casualty/theft loss could provide possible itemized deduction (remember big
10% of AGI hurdle). Qualifying replacement property depends on whether TP is (i) an owner-user (in which case 6. the F unctional— Use test is used — replacement property must be used in the same way as the
converted property) or (ii) an owner-investor (in which case the T axgayer- Use test is used —
replacement property must have the same relationship of service or use to the TP as the
converted property had). But, more liberal replacement rules apply for condemnation of
real property. | Time limits and reporting requirements too. Deprecation can get tricky for 1031 exchanges and 1033 involuntary conversions.
Basically, excess basis of acquired MACRS property is treated as being newly purchased (thus, new asset is treated as being two distinct properties for depreciation purposes — i.e.,
the exchanged basis and excess basis). If such rules are too burdensome, TP may elect for
treat entire basis (i. e. , both the exchanged/carryover basis and the excess basis) of the
replacement MACRS property as being place in service by the acquiring TP at the time of
replacement. Some Other Nonrecognition Transactions:
a. CORPS: Section 351 may provide no G/L to shareholders if property contributed for stock of controlled corporation; Section 1032 may provide no G/L for the corporation
on the exchange of its stock for money or property. b. PARTNERSHIPS: Section 721 may provide no G/L to either partners or partnership
when property contributed to partnership in exchange for partnership interest. c. Some stock—for-stock exchanges involving the same corporation. ...
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- Spring '11