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Lecture Fundamentals of taxation 2014 (7/e) - Chapter 12: Special property transactions

When you have completed this chapter, you should understand the following learning objectives: Explain how to defer gains using the like-kind exchange rules, describe how to account for and report involuntary conversions, apply the tax rules to report an installment sale, explain how to exclude a gain on the sale of a personal residence, apply the rules affecting related parties and wash sales. | Chapter 12 Special Property Transactions “A fool and his money are soon parted. It takes creative tax laws for the rest.” --- Bob Thaves (“Frank & Ernest”) 1 LO #1 Like-Kind Exchange Rules 3 criteria for a like-kind exchange: There must be an exchange; The property transferred and the property received must be held for productive use in a trade or business or for investment; The property must be like-kind. Exchange rules are not elective 12-2 2 The like-kind exchange rules are not elective. If the three criteria are met, the exchange rules must be used. LO #1 Like-Kind Exchange Not eligible for like-kind treatment Inventory Stocks, bonds, etc. Debt instruments Interest in a partnership Certificates of trust Dealer does not qualify for like-kind exchange treatment 12-3 3 Dealers in a product (e.g., a car dealer) can never exclude gains by using the like-kind rules. Like-kind exchanges are disallowed for stocks, bonds, and partnership interests as well. LO #1 Like-Kind Exchange What is a like-kind asset? Same nature or character Grade or quality does not matter Same depreciation class Boot Property – any extra consideration given or received other than the like-kind property 12-4 4 A like-kind asset does not have to be an exact duplicate to qualify as a like-kind exchange. “Boot” property is any property given or received in addition to the like-kind asset – usually cash. LO #1 Like-Kind Exchange Recognized gain is the lesser of: The FMV of the boot received; or The realized gain on the exchange. Receipt of boot causes recognition of gain Giving boot does not cause gain recognition 12-5 5 With like-kind exchanges, gain is recognized to the lesser of the realized gain or the boot received. Giving of boot does not trigger gain recognition. LO #1 Like-Kind Exchange Basis calculation of property received Basis of property given Plus basis of boot given Plus gain recognized Less boot received Or, FMV of property received less deferred gain. 12-6 6 The easiest method to . | Chapter 12 Special Property Transactions “A fool and his money are soon parted. It takes creative tax laws for the rest.” --- Bob Thaves (“Frank & Ernest”) 1 LO #1 Like-Kind Exchange Rules 3 criteria for a like-kind exchange: There must be an exchange; The property transferred and the property received must be held for productive use in a trade or business or for investment; The property must be like-kind. Exchange rules are not elective 12-2 2 The like-kind exchange rules are not elective. If the three criteria are met, the exchange rules must be used. LO #1 Like-Kind Exchange Not eligible for like-kind treatment Inventory Stocks, bonds, etc. Debt instruments Interest in a partnership Certificates of trust Dealer does not qualify for like-kind exchange treatment 12-3 3 Dealers in a product (e.g., a car dealer) can never exclude gains by using the like-kind rules. Like-kind exchanges are disallowed for stocks, bonds, and partnership interests as well. LO #1 Like-Kind Exchange What is