BA 128A-1 3/29

1. BA 128A-1 3/29 • Questions from lecture • Review Chapter 12 • Assignment I12-28,29,40,43 • Additional assignment I2-26,42,46

2. Nontaxable Exchanges for property transactions • Three types • Like-kind exchanges • Involuntary conversions • Sales of a personal residence

3. Like-kind exchange • Only applied to assets held for • production or use in trade/business • investment purposes • Non recognition of gain or loss is mandatory if qualified • like-kind - real property vs. real property, real property outside US <> real property in the US, personal property - within same general asset class e.g. furniture and fixtures, automobiles. (like-classes) Each property can only have 1 general asset class • What does not have like classes - intangible personal property, non depreciable personal property or personal property held for investments • direct exchange • What is not like-kind • securities or inventory • except common stock of same corporation - preferred vs. common stock of same corporation not like-kind • personal use assets

4. Like-kind exchange (cont) • Non-simultaneous exchange - OK if completed within a specified time period (exchange identified within 45 days and property received the earlier of 180 dyas after property is transferred or the due date for filing a return • Realized vs. recognized • Boot received - gain is recognized to the extent the boot is received but not greater than the amount realized • Liabilities assumed by purchased party is considered cash received by taxpayer. If both parties assumed liabilities, the difference between liabilities assumed is the boot • Basis of property = Basis of property exchanged - boot received + gain recognized - loss recognized • Related party transactions- 2 year rule • Non like-kind property - recognized difference between FMV and adjusted basis • Holding period - capital asset - use exchanged property’s holding period, boot property - date of exchange

5. Involuntary conversions • Election basis, applies only to gains - deferral, not losses • Basis of replacement property = property’s cost reduced by amount of gain deferred • Definition- theft,seizure,condemnation, destruction • Replacement period - from date of involuntary conversion to 2 years after the end of the tax year when the gain is realized; for condemnation - 3 years • If replacement property cost < amount realized, gain must be recognized • holding period = replaced property holding period

6. Involuntary conversions • Severance damages - compensation for decline in value, analogous to proceeds of property insurance, amount received reduces basis of property • Replacement property - similar or related in service. Use functional test except taxpayer use test for own and leased property and like-kind property for condemnation of business/trade/investment property

7. Sale of principal residence • Exclusion of gain. $250,000 for single, $500,000 for married filing jointly • Determined on individuals basis • One exclusion every two years • exception - part of the gain may be excluded if sale/exchange is due to a change of employment, health or unforeseen circumstances, see e.g. I2-59 • Principal residence - use most of the time • Selling expenses increase adjusted basis • Involuntary conversion treated as sale, exclusion rule and deferral rule both apply, functional test used for replacement property • Presidential Declared Disaster after 8/31/91, gain from receipt of insurance proceeds is excluded

8. Tax planning considerations • Nontaxable like-kind exchange • need to offset capital loss with capital gain • deferred gain reduced basis, no depreciation recognized • Almost always want to use the sale of principal residence to exclude gain • Election to defer gain for involuntary conversion - tax rate and capital loss offset, non-recognition is mandatory if property is directly converted into similar property