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Like-Kind Exchanges

Like-Kind Exchanges. Presenters: Rich Alpern Mike Varga. Accounting 508 Professor Thomas C. Omer Spring Semester 2000. Like-Kind Exchanges. IRC Section 1031 No gain or loss shall be recognized on the exchange of property if such property is exchanged solely for property of like-kind

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Like-Kind Exchanges

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  1. Like-Kind Exchanges • Presenters: • Rich Alpern • Mike Varga Accounting 508 Professor Thomas C. Omer Spring Semester 2000 Accounting 508 Presentation

  2. Like-Kind Exchanges • IRC Section 1031 • No gain or loss shall be recognized on the exchange of property if such property is exchanged solely for property of like-kind • Both the property transferred and the property received must be held for either productive use in business or for investment. • If an exchange qualifies as a like-kind exchange, non-recognition of gain or loss is mandatory Accounting 508 Presentation

  3. Like-Kind Exchanges • “Like-Kind” defined: • Like-kind refers to the nature or character of the property. • Exchanges of real property for real property • Personal property for personal property • Personal property must be of a like class • Depreciable, tangible property within same general asset or product class • i.e. Exchanges of office furniture, exchanges of automobiles, exchanges of computers, etc. Accounting 508 Presentation

  4. Like-Kind Exchanges • Like-kind defined (cont’d): • Exchanges of real property must be located in the U.S. and personal property that is exchanged must be used predominantly in the U.S. • A direct exchange of property must occur • sale and subsequent purchase does not qualify (An exchange of inventory or securities does not qualify as a like-kind exchange) Accounting 508 Presentation

  5. Like-Kind Exchanges + OR FMV = $23,000 Basis = $15, 000 FMV = $20,000 Basis = $13,000 Value = $3,000 • If the items exchanged are not of equal value, non-like kind property or money may be given to complete the exchange • The cash or non-like kind property is called Boot • Recognized gain is the lesser of boot received or realized gain Accounting 508 Presentation

  6. Like-Kind Exchanges • Transactions involving liabilities: • The one who assumes the debt or takes property subject to a liability is treated as having paid cash boot. • The party relieved of the liability received cash boot. • If each party assumes a liability, only the net liability given or received is treated as boot Accounting 508 Presentation

  7. Like-Kind Exchanges Basis of Like-Kind property received: Basis of property received in a non-taxable exchange Basis of property received in a non-taxable exchange Basis of property exchanged Loss Recognized Boot Received Gain Recognized - = - + Accounting 508 Presentation

  8. Like-Kind Exchanges • Holding period for property received: • Like-kind property • Includes holding period of property exchanged • Boot • Begins the day after the date of the exchange. Accounting 508 Presentation

  9. Like-Kind Exchanges FMV = $23,000 Basis = $15, 000 FMV = $20,000 Basis = $13,000 • This exchange qualifies as a like-kind exchange: • both items are personal property used for business • both properties are of a like class (Asset Class 00.242) • both properties are predominately used in the U.S. • Your transaction in a direct exchange • Neither property is an inventory item nor a security Accounting 508 Presentation

  10. Like-Kind Exchanges + & Asset B George FMV = $20,000 Basis = $13,000 Debt = $10,000 Asset A John FMV = $23,000 Basis = $15, 000 Debt = $7,000 FMV = $3,000 Basis = $1,000 Cash = $3000 Basis of property received in a non-taxable exchange Basis of property received in a non-taxable exchange Basis of property exchanged Loss Recognized Boot Received Gain Recognized - = - + George’s Basis in A = $17000 - $3000 + $5000 - $0 $19,000 John’s Basis in B = $18,000 - $6000. + $6000 - $0 $18,000 John’s Basis in Comp = $3000 (FMV) Accounting 508 Presentation

  11. Like-Kind Exchanges • End Result for John: • Realized gains and losses from nontaxable exchanges are deferred. • John deferred gain = $2000 • Realized Gain ($8000) - Recognized Gain ($6000) • On Subsequent Sale of newly acquired truck • John’s recognized gain = $2000 • Amount realized ($20,000) minus adjusted basis ($18,000) • The holding period for the old truck transfers to the newly acquired truck. • The holding period for the computer begins on the day after the transaction. Accounting 508 Presentation

  12. Like-Kind Exchanges • End result for George: • Realized gains and losses from nontaxable exchanges are deferred. • George deferred gain = $4000 • Realized Gain ($9000) - Recognized Gain ($5000) • On Subsequent Sale of newly acquired truck • George’s recognized gain = $4000 • Amount realized ($23,000) minus adjusted basis ($19,000) • The holding period for the old truck transfers to the newly acquired truck. Accounting 508 Presentation

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