Form 8824 usage
-Required in the year of the exchange.
-For exchanges between related parties, filing required for two additional years.
Information needed for form 8824
-Description of property received and exchanged.
-Calculation of substituted basis in new property.
-Related party information, if applicable.
Qualifying Transactions (like kind exchange)
- Applies to IRC section 1231 property.
- Includes property held for income production or used in a trade or business.
- Only realty exchanges for realty are considered qualifying after recent tax code changes.
- Like-kind property refers to the same nature or character, not necessarily the same quality.
- Example: Exchange of raw land for an apartment building is acceptable.
Property identification (like kind exchange)
Must be identified in a written agreement within 45 days after surrendering the transferred property.
Could you exchange raw land for an apartment building (like kind exchange)
Yes - Like-kind property refers to the same nature or character, not necessarily the same quality.
When must you receive property? (like kind exchange)
Get the new property within 180 days after giving away the old one or by the tax return deadline (with extensions) for the year you gave away the old property.
Non qualifying property
- Anything that’s not real estate
- Livestock
- Inventory or items for sale
- Intangible assets like stocks, bonds, and partnership interests
- Real estate outside the United States
Non qualifying property is treated as what
BOOT
Liabilities (like kind exchange)
- Liabilities may be assumed in a like-kind exchange.
- Assuming debt is like getting cash (boot) and could be taxable.
- If liabilities are swapped, the one relieved of more debt than assumed gets boot.
- Transferring assets reduces gain, while transferring liabilities increases it.
Boot
- Non-qualifying property is treated as boot.
- Receiving cash is automatic boot.
- Only debt relief greater than debt assumption is boot.
- Example: If one party adds something extra (like a copy machine) in an exchange, it’s boot for the other party.
Related party transactions
- Related party transactions are allowed under §267 but with restrictions.
- Related persons include spouse, child, grandchild, parent, sibling, or if the taxpayer owns more than 50% of the stock (corporation) or interests in partnerships or LLCs.
- If either property is disposed of within two years of the exchange, like-kind tax treatment is disallowed, and deferred gain is recognized immediately by both parties.
- Exceptions are granted for dispositions due to death or involuntary conversions.
Calculation of a Like-Kind Exchange
- Amount Realized: Fair Market Value (FMV) of qualifying property received, plus or minus net boot.
- Gain Realized: Amount realized minus the basis of the property transferred away.
- Gain Recognized: Lesser of gain realized or net boot received.
- Deferred Gain: Gain realized minus gain recognized.
- Substituted Basis: FMV of qualifying property received minus deferred gain. Alternatively, it can be calculated by adding net boot given away to the basis of the old property.
John Appleton wants to exchange his farm for a Bed and Breakfast owned by Martha Shelby. John’s farm has a FMV of $680,000, an adjusted basis of $200,000, and is subject to a $120,000 mortgage. Martha’s B&B has a FMV of $800,000, with an adjusted basis of $400,000, and is debt-free. In the exchange, Martha will assume John’s mortgage. To help equalize the exchange, John is including farm equipment worth $150,000, and will also pay Martha $90,000 in cash.
What is the gain recognized and the substituted basis in the newly acquired properties for each taxpayer?
What is automatic boot?
receiving cash
Debt relief greater than what is boot?
debt assumption
Boot example
If one party adds something extra (like a copy machine) in an exchange, it’s boot for the other party.
Can you assume liabilities in a like kind exchange?
Liabilities may be assumed in a like-kind exchange.
Assuming debt in a like kind exchange is like what and treated how?
Assuming debt is like getting cash (boot) and could be taxable.
If liabilities are swapped, who gets boot?
If liabilities are swapped, the one relieved of more debt than assumed gets boot.
In a like kind exchange, transferring assets does what?
reduces gain
In a like kind exchange, transferring liabilities does what?
increases gain
Related parties under under §267 include
spouse, child, grandchild, parent, sibling, or if the taxpayer owns more than 50% of the stock (corporation) or interests in partnerships or LLCs.
Like Kind Exchange Amount Realized
Fair Market Value (FMV) of qualifying property received, plus or minus net boot.
Like Kind exchange gain realized
Amount realized minus the basis of the property transferred away.
