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Chapter 15 Notes

Chapter 15 Notes - Bob Ryan DePaul University Accounting...

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Bob Ryan DePaul University Class Notes Accounting 380 Tax Treatment of Individuals and Property Transactions Text 2012 Chapter 15 – Property Transactions: Non Taxable Exchanges 1. Nontaxable Transactions: a. In a nontaxable transaction, realized gain or loss is not currently recognized 1. recognition is postponed to a future date (via a carryover basis) rather than eliminated. b. In a tax free transaction non recognition of realized gain is permanent. c. Holding period for new asset: 1. the holding period of the asset surrendered in a nontaxable transaction carries over to the new asset acquired. d. Depreciation recapture: 1. potential recapture from the asset surrendered carries over to the new asset acquired in the transaction. 2. Like Kind Exchanges: a. Sec. 1031 requires nontaxable treatment for gains and losses when : 1. form of transaction is an exchange 2. assets involved are used in trade or business or held for production of income a. inventory, securities, and partnership interest do not qualify 3. asset exchange must be like kind in nature or character as replacement property. b. Like kind property defined: 1. interpreted very broadly a. real estate for real estate 1. improved for unimproved real estate qualifies 2. U.S. realty for foreign realty does not qualify b. tangible personal property for tangible personal property 1. must be within same general business asset or product class. 2 livestock of different sexes does not qualify 1
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3 personal property (US) for personal property (outside US) does not qualify. c. When taxpayers involved in an exchange are related parties : 1. to qualify for nontaxable exchange treatment related parties must not dispose of property exchanged within 2 year period following exchange. 2. if early disposition occurs, postponed gain is recognized as of date of early disposition. a. disposition due to death, involuntary conversion and certain non- taxable avoidance transactions are not treated as early dispositions. d. Exchange requirements: 1. the transaction must involve a direct exchange of property to qualify as a like kind exchange 2. if the exchanged is a delayed (non simultaneous) exchange, there are time limits on its completion. a. the new property must be identified within 45 days of the day the old property was transferred. b. the new property must be received by the earlier of the following: 1. within 180 days of the date when the old property was transferred 2. the due date including extensions for the tax return covering the year of the transfer. e. Boot: 1. any property involved in the exchange that is not like kind property is “boot”. 2. the receipt of “boot” causes gain recognition equal to the lesser of boot received (FMV) or gain realized. a. no loss is recognized even when boot is received.
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