Nontaxable Exchanges Flashcards
(26 cards)
What is a deferred gain transaction?
A situation where a gain is realized but not immediately recognized for tax purposes; tax on the gain is postponed until a later event.
What is realized gain?
The difference between the fair market value (FMV) received and the adjusted tax basis (ATB) of the property given up
What is recognized gain?
The portion of the realized gain that is currently subject to tax.
What are the main types of nontaxable exchanges?
Like-Kind Exchanges (Section 1031)
Involuntary Conversions (Section 1033)
Life Insurance Policy Exchanges (Section 1035)
What property qualifies for a Section 1031 exchange?
U.S. real property held for business or investment purposes (not personal use).
What property is NOT eligible for Section 1031?
Tangible personal property (since TCJA)
Personal assets (e.g., primary residence)
Inventory
Stocks, bonds, notes, partnership interests, certificates of trust or beneficial interests
What is considered ‘like-kind’ property?
Real estate for real estate (land for building, land for land, building for building, etc.). U.S. realty cannot be exchanged for foreign realty.
What is ‘boot’ in a like-kind exchange?
Any property received that is not like-kind (e.g., cash, equipment, debt relief). Receiving boot triggers gain recognition up to the amount of boot received.
How is debt relief treated in a 1031 exchange?
Debt relief is considered boot. If your mortgage is paid off as part of the exchange, it is treated as boot and may trigger gain recognition.
What happens if you pay boot?
No gain is recognized; increase your basis in the new property by the amount of boot paid.
What happens if you receive boot?
Recognize gain to the extent of boot received, up to the realized gain.
Are losses recognized in a like-kind exchange?
No, losses are deferred until the replacement property is sold.
What are the requirements for a valid Section 1031 exchange?
Must be a direct exchange of property.
For delayed exchanges:
Identify new property within 45 days of transferring the old property.
Receive new property by the earlier of 180 days after transfer or the tax return due date (including extensions) for the year of transfer.
How do you calculate recognized gain in a 1031 exchange?
Recognized gain is the lesser of boot received (FMV) or realized gain.
How do you calculate the basis in like-kind property received?
FMV of new asset
– Gain not recognized
Loss not recognized
= Basis in new asset
What is the code approach formula for basis?
Adjusted basis of like-kind asset given
*Adjusted basis of boot given
*Gain recognized
– FMV of boot received
– Loss recognized
= Basis in new asset
Exchange with No Boot
Taxpayer A: Land (AB $60,000, FMV $100,000)
Taxpayer B: Building (AB $70,000, FMV $100,000)
No boot exchanged. Both have realized gain, but no gain is recognized; each takes a carryover basis in the new property (A: $60,000, B: $70,000).
Exchange with Debt Relief as
Boot
Taxpayer exchanges property (FMV $500,000, AB $200,000, mortgage $100,000) for property (FMV $400,000).
Debt relief ($100,000) is treated as boot. Recognized gain is $100,000 (lesser of boot or realized gain).
What is a Section 1033 involuntary conversion?
Triggered by events like disasters or condemnation. Gain is deferred if proceeds are reinvested in similar property within a specified time (usually 2 years; 3 years for realty).
What is a Section 1035 exchange?
Allows tax-free exchange of life insurance policies, endowments, or annuities for similar contracts.
What is the treatment of losses in nontaxable exchanges?
Losses are not recognized; they are deferred until the replacement property is sold.
What triggers gain recognition in a like-kind exchange?
Receiving boot (cash, debt relief, or non-like-kind property).
What are the key timing rules for delayed exchanges?
45 days to identify new property
180 days to complete the exchange
What are allowable exchange expenses in a 1031 exchange?
Brokers’ commissions
Exchange fees
Title insurance (owner’s policy)
Escrow fees
Appraisal fees (required by contract)
Transfer taxes
Recording fees
Attorney’s fees (sale or purchase-related)
