8 business property can be exchanged for investment

Info icon This preview shows pages 3–5. Sign up to view the full content.

8. Business property can be exchanged for investment property. Example An exchange of a pickup truck for a dump truck may qualify as a like-kind exchange. However, an exchange of an apartment building for a barge cannot be like-kind, because it is an exchange of realty for personalty. 9. Property located outside the United States will not qualify as like-kind when exchanged for property located inside the United States. 10. There are special rules that apply to like-kind exchanges when like-kind property is acquired from related taxpayers. 11. Exchange of insurance policies No gain or loss is recognized on an exchange of certain life, endowment, and annuity contracts to allow taxpayers to obtain better insurance. Holding Period Holding period of like-kind property surrendered tacks on to the holding period of like-kind property received. b. Like-Kind Exchanges and the Receipt of Boot —The receipt of boot triggers gain recognition. Definition Boot : Nonqualifying property received by the taxpayer. A. Cash and nonqualifying (not like-kind) property received are considered boot received. B. Mortgage relief is treated as boot received . If the taxpayer assumes the other party's mortgage that is treated as boot given. Mortgage relief can be offset by mortgage assumed . However, if the taxpayer assumes a larger mortgage than he or she gives up, this excess reduces his amount realized, but it does not reduce other boot received (cash or non like-kind property). Example As part of a like-kind exchange, Taxpayer F receives cash of $5,000, debt relief of $20,000, and she assumed debt on the new property received of $23,000. The net debt relief is –$3,000, and this reduces the amount realized by
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

$3,000. However, it cannot reduce the $5,000 of cash boot received. So F's boot received is $5,000. C. Boot does not cause realized losses to be recognized. D. The basis of like-kind property received can be computed as follows in two different ways: 1. Formula 1 FMV of property received – Postponed gain + Postponed loss Basis of like-kind property received 2. Formula 2 Adjusted basis of property given away + Gain recognized + Boot given (cash paid; debt assumed) – Boot received (cash received; debt relief) Basis of like-kind property received E. Basis of non-like-kind property received is the property's FMV, since gain has been recognized to that extent . Example Question: Leker exchanged a van that was used exclusively for business and had an adjusted tax basis of $20,000 for a new van. The new van had an FMV of $10,000, and Leker also received $3,000 in cash. What was Leker's tax basis in the acquired van? Answer: Leker has a realized loss on this exchange of $7,000 ($13,000 amount realized— $20,000 adjusted basis). He received $3,000 of boot, but boot does not cause realized losses to be recognized. Therefore, the recognized loss is zero and the postponed loss is $7,000 .
Image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.
  • Spring '17
  • Wendy Achiles
  • partner

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern