Chapter 12
Property Transactions,
Nontaxable Exchanges
Learning Objectives
? Understand the tax consequences arising
from a like-kind exchange
? Determine the basis of property received in a
like-kind exchange
Learning Objectives
? Determine whether gain from an involuntary
conversion can be deferred
? Determine the basis of replacement property
in an involuntary conversion
? Determine when a gain resulting from sale of
principal residence may be excluded
Like-kind Exchanges
Like-kind Property Defined
? Refers to nature
and quality
? Same class
– Personal property for
personal property
– Real property for real
property
? Certain properties do
not qualify for like-
kind exchange
Like-kind Exchanges
A Direct Exchange Must Occur
? Direct exchange not
a conversion into
proceeds with a
subsequent
purchase
? Certain
interdependent
transactions may
receive exchange
treatment
? Three-party
exchange
Like-kind Exchanges
Three-party Exchanges
? Three parties may
be involved in a
simultaneous or
non-simultaneous
like-kind exchange
? Finding a suitable
exchange property
may be difficult
Like-kind Exchanges
Receipt Of Boot
? Gain is recognized to
extent of boot
received,limited by
realized gain
– Loss is never
recognized
? Boot is any non-
qualifying property
? Mortgages are offset
to determine if there is
net boot
Like-kind Exchanges
Basis Of Property Received
? Basis of property
given up less boot
received plus gain
recognized
? Basis of non-
qualifying property
(boot) is the
property’s FMV
Like-kind Exchanges
? Exchanges
between related
parties
? Transfer of non-
like-kind
property
? Holding period
Involuntary Conversions
Involuntary Conversion Defined
? Includes theft,seizure,
requisition,
condemnation,or
destruction of property
? Gains arise when
insurance or
government proceeds
exceed the property’s
adjusted basis
? Severance damages
Involuntary Conversions
? Tax treatment of
gain due to an
involuntary
conversion directly
into similar
property
? Replacement
property
Involuntary Conversions
? Obtaining replacement
property
– Taxpayer must purchase
the replacement property
? Time requirements
– Normal replacement
period is 2 years after the
end of the tax year
– Property held for use in
trade or business can be
replaced within 3 years
after the end of the tax
year
Sale Of Principal Residence
Sale Of Principal Residence
? Principal residence
defined
– Taxpayer has only one
principal residence
– It can be condo,houseboat,
or house trailer
– If taxpayer owns multiple
residences,facts and
circumstances on a case by
case basis
Sale Of Principal Residence
? New exclusion
applies to one sale
or exchange every
two years*
? Must satisfy the
ownership and use
tests
Sale Of Principal Residence
? Excluded gain
– Up to $250,000
per individual
taxpayer
– $500,000 for
married filing
jointly
Sale Of Principal Residence
? Involuntary
conversion of a
principal residence
may be handled
under the
involuntary
conversion or the
principal residence
rules
Tax Planning
Considerations
Compliance And Procedural
Considerations
Compliance And Procedural
Considerations
? Involuntary conversions
? Reporting sale or exchange of
principal residence
– Gain reported on Schedule D