Transcript Module 4 - TaxPoint 2001
Module 21 Tax Deferred Exchanges
Menu Tax deferred exchanges and the concept of substituted basis §1031 like-kind exchanges §1033 involuntary conversions Exchanges in qualifying corporate reorganizations Miscellaneous tax deferred exchanges
Tax Deferred Exchanges and the Concept of Substituted Basis Key Learning Objectives (1) Realized gain or loss Recognized gain or loss Postponed gain or loss
Realized Gain or Loss The difference between Fair market value (FMV) and Adjusted basis (A/B) Of property sold or disposed of.
Recognized Gain or Loss Amount of realized gain or loss Taxable or deductible for income tax purposes.
Postponed Gain or Loss Difference between realized gain or loss and recognized gain or loss
Tax Deferred Exchanges and the Concept of Substituted Basis Key Learning Objectives (2) Purchase price basis Carryover basis Substituted basis
Purchase Price Basis Fully taxable transaction Purchase price becomes the adjusted basis Holding period begins on the date of purchase
Carryover Basis The basis of the transferee Basis of the transferor + Any gain recognized Holding period of the transferee Includes the transferor’s
Substituted Basis Property received basis is Its fair market value Purchase price basis Reduced by postponed gain Increased by postponed loss
§1031 Like-Kind Exchanges
Key Learning Objectives (1) Introduction to like-kind exchanges Qualifying properties under §1031 The like-kind requirement: realty The like-kind requirement: personality
§1031 Like-Kind Exchanges In all cases need to determine Gain/loss realized Gain recognized Losses are never recognized Basis adjustment required to reflect gain/loss not recognized
Introduction to Like-Kind Exchanges Not elective No gain/loss recognition if property is exchanged for “like-kind” property Used in T/B or held for investment And no “boot” is received for gain Loss is never recognized
Non-Qualifying Properties Under §1031 §1031 excludes Inventory Partnership interest Stock/bonds/securities Evidence of indebtedness Certain non-qualified preferred stock
The Like-Kind Requirement Real Estate Like-kind broadly construed Real estate for any real estate
The Like-Kind Requirement Personality Like-kind broadly construed Personality IF substantially the same use as original property
Boot Any property received or given up in an exchange that does not qualify for tax deferral treatment Property not like-kind Non-qualifying property Net debt relief
Research Query: Gold for Silver?
The taxpayer has gold bullion that she would like to exchange for silver bullion Does this qualify as a like kind exchange under §1031?
Solution--Research Query: Gold for Silver? Not Like-Kind Rev Rul 82-166, 1982-2 CB 190 The values of silver and gold bullion are determined solely on the basis of metal content They are "intrinsically” different Used in different ways Silver--essentially an industrial commodity Gold--primarily utilized as investment in itself
§1031 Like-Kind Exchanges
Key Learning Objectives (2) Computation of gain or loss under §1031 The effects of liabilities on recognized gain or loss Special §1031 problems: deferred exchanges Special §1031 problems: related party exchanges
Computation of Gain or Loss Under §1031 Gain realized is recognized to extent of FMV of boot Losses never recognized even with boot
In Class Exercise: Recognition Under §1031 Case A/R Like-Kind Boot Total A/R A/B Like-Kind Boot Total A/R Realized A B C D E 100 100 100 100 100 6 15 15 100 106 100 115 115 110 110 15 0 80 8 105 0 90 0 125 110 88 105 90 (25) (4) 12 10 25
Solution--In Class Exercise: Recognition Under §1031 Losses not recognized if §1031 applies No loss recognition Cases A & B Gains not recognized if no boot No gain recognition Case C No recognition in excess of realization 10 recognized; but 15 boot Case D Gain recognized to extent of boot 15 of 25 realized gain is recognized Case E
Computation of Substitute Basis Under §1031 Basis in new property = FMV of like-kind property received - Gain not recognized + Loss not recognized
In Class Exercise: Basis Calculation Under §1031 Case A/R Like-Kind Boot Total A/R A/B Like-Kind Boot Total A/R Realized A B C D E 100 100 100 100 100 6 15 15 100 106 100 115 115 110 110 15 0 80 8 105 0 90 0 125 110 (25) 88 (4) 12 105 90 10 25
Solution--In Class Exercise: Basis Calculation Under §1031 Start with FMV of like-kind received Case FMV A B C D E 100 100 100 100 100 - Gain deferred +Loss deferred 0 0 25 4 12 0 0 10 0 0 New Basis 125 104 88 100 90
Special §1031 Problems: Deferred Exchanges Three corner exchanges may be OK A wants C’s property & tax deferral B wants A’s property B purchases C’s property B exchanges with A A should get tax deferral
Special §1031 Problems: Non-Simultaneous Exchange A wants tax deferral but has not picked replacement property B wants A’s property and is willing to acquire any property A wants B gets A’s property right now A’s property chosen within 45 days A’s property delivered within 180 days
§1033 Involuntary Conversions Key Learning Objectives (1) Tax deferral Losses on involuntary conversions Recognized gain Basis of replacement property Destruction and theft conversions
Defer Recognition by Reinvesting in qualified property Within specific time limits Realization year + 2 tax years Losses recognized Unless personal use property
In Class Exercise: Involuntary Conversion--Gain Recognition Case A/R A/B Realized A 200 200 225 180 (25) B 20 C 200 200 180 180 20 D 20 E 200 180 20 Reinvest N/A -0 205 192 175 In each case determine the gain recognized
Solution--In Class Exercise: Recognition Under §1033 Case A Losses always recognized Unless personal use property; then deductible only if casualty loss Case B Full recognition of gain if no reinvestment Case C Full deferral if A/R (or greater) reinvested
Solution--In Class Exercise: Recognition Under §1033 Case D Recognize gain to extent A/R not reinvested. Recognize Defer 8 12 Case E Recognize 20 Full recognition of gain since amount reinvested is 25 short of A/R and realized gain was 20
Involuntary Conversion Substituted Basis Basis = cost of new - gain deferred Generally an elective provision So could choose to recognize gain
In Class Exercise: Involuntary Conversion--New Basis Case A/R A/B Realized A 200 200 225 180 (25) B 20 C 200 200 180 180 20 D 20 E 200 180 20 Reinvest N/A -0 205 192 175 In each case determine the basis in the new property
Solution--In Class Exercise: Basis in New Under §1033 Start with purchase price of new Case A B C D Purchase price N/A N/A - Gain deferred New Basis N/A N/A 205 192 20 185 12 180 E 175 0 175
Involuntary Conversion Theft or Destruction Generally deals with gains only As per casualty/theft But suddenness not required Occurs if insured for replacement cost and property is appreciated
§1033 Involuntary Conversions Key Learning Objectives (2) Condemnations Qualified replacement property: owner-user properties Qualified replacement property: owner-lessor properties Qualified replacement period
Involuntary Conversion Condemnation Forced transfer to governmental authority w/ power to enforce sale Taken for public use Seizure Requisition Condemnation Sold under threat of condemnation
Replacement Property--Similar or Related in Use or Service Owner who is user must meet Functional use test Replacement serves same function in taxpayer's business
Replacement Property--Similar or Related in Use or Service Owner who is lessor must meet Taxpayer use test Rental property replaced with any rental property
Special Rules for §162 or §212 Property Get an extra year to reinvest Replacement can be “like-kind” See §1031 definition
Exchanges in Qualifying Corporate Reorganizations Key Learning Objectives Character of gain to shareholders and security holders Basis of the shareholder's replacement stock and/or securities
Character of Gain to Shareholders and Security Holders Ordinary income if the receipt of the boot has the same effect as the distribution of a dividend
Basis of Shareholder’s Replacement Stock/Securities Basis of stock/securities received is Adjusted basis of stock or securities surrendered + Gain recognized on the exchange - Boot received in the exchange
Seven Organizational Patterns Qualifying for Non-Recognition Described in §368(a)(1)(A) through Sec. 368(a)(1(G). Stock and securities received in a corporate reorganization is treated in much the same way as a like-kind exchange
Miscellaneous Tax Deferred Exchanges Key Learning Objectives (1) An overview Transfers between spouses §1041 Exchanges of life insurance, endowment, and annuity contracts §1035
Miscellaneous Tax Deferred Exchanges Key Learning Objectives (2) Divestitures under conflict-of-interest rules §1043 Investments in specialized small business investment companies §1044 Reinvestments of proceeds of an ESOP sale §1042