Like-Kind Exchanges

Question 1

If you meet the requirements of a like-kind exchange how are losses and gains treated?

Answer 1

1) Losses are never recognized from a like-kind exchange
2) Recognized gain if the lesser of:
- Realized Gain
- Boot Received

Question 2

Define Boot:

Answer 2

Any non-like kind property (cash or asset that doesn’t meet the like-kind rules)

Question 3

Is debt relief considered boot?

Answer 3

Yes!

Question 4

What is considered like-kind property? What property applies?

Answer 4

Realty is land and buildings

Only business or investment property

Question 5

What is the formula to calculate the gain or loss from like-kind exchanges?

Answer 5

FMV of real estate received
+ Liability assumed by other party (boot received)
- Liability assumed on new real estate (boot given)
= Amount realized on the exchange

• Adjusted basis of old real estate transferred

= Gain realized

Question 6

How do you calculate the new basis in property received?

Answer 6

Basis of the old real estate 
\+ Liability assumed by taxpayer 
\+ Gain recognized 
- Liability given 
= Basis of the new real estate

Question 7

IF you have a like-kind exchange that results in a loss, how do you calculate the basis?

Answer 7

FMV of property received
- Postponed gain
+ Postponed loss
New Basis

Question 8

what is the holding period for like-kind exchanges?

Answer 8

it carries from the old property

Question 9

What is a involuntary conversion? Do you have to recognize the gain or loss?

Answer 9

Theft, natural disaster, condemnation of property.

Because this is a disposition, a gain or loss will be realized

Will it have to be recognized?
- Gain: Will not have to be recognized to the extent that a replacement property was purchased. It has to be similar or related in service or use.

• it has to be replaced within two years

Question 10

How do you calculate the gain in an involuntary conversation?

Answer 10

Amount realized from conversion (insurance proceeds)
- Adjusted basis old old property
= Realized Gain/Loss

Amount realized from conversion (insurance proceed)
Cost of the replacement property
= Amount not reinvested

*Recognized gain is the lower of realized gain or the amount not reinvested

Losses are never deferred under these rules (it will be treated as a casualty loss)

Question 11

How do you calculate the basis of the new property received from the involuntary conversion?

Answer 11

FMV of the property received
- Postponed gain (difference between realized and recognized)
+ Postponed loss
= Basis in the new property