Disclaimer: This is a test on how the author will take study notes in the future and testing the lay-out of the website. Please do not use the below information or on this website for any subject matters or for use of examinations. Furthermore, the author is not rendered any service in accounting, taxation or similar professional services.
Study Notes on Exchanges
IX. Section 1031 Exchange (Miscellaneous)
- The like-kind property received under §1031 is not treated as a payment in the year of disposition (§453(f)(6)(C)).
- The gross profit from the exchange is reduced by the gain not recognized (453(f)(6)(B)).
- The contract price does not include the value of the like-kind property (§453(f)(6)(A)).
- The taxpayer’s basis in the property put into the exchange is allocated first to the like-kind property received to the extent of its fair market value. Any remaining basis is used to calculate the gross profit ratio.
The excess of (a) the selling price over the sum of (b) the adjusted basis of the property, and (c) if the taxpayer is not a dealer in real property, commissions, and other selling expenses. (Reg. §1.453-1(b).)
The sum of (a) cash payments received in the year of disposition, (b) the fair market value of all the property received in the year of disposition with the exception of evidence of indebtedness of the purchaser, (c) the face amount of the evidence of indebtedness of the purchaser, and (d) if the purchaser either assumes an obligation of the seller or takes the property subject to such an obligation, the unpaid balance of the obligation. (Reg. §1.453-4(c).)
It is equal to the selling price reduced by the amount of the seller’s obligation assumed by the purchaser or to which the property is subject to the extent such obligations do not exceed the seller’s adjusted basis in the property.
Gain Recognized =Installment payments received X Gross Profit/Total contract price
It is bona fide.
- Taxpayer’s family.
- A corporation in which the taxpayer has more than 50% ownership.
- A partnership in which the taxpayer directly or indirectly owns more than a 50% interest of the capital or profits.
- Two partnerships in which the taxpayer directly or indirectly owns more than 50% of the capital interests or profits.
On the date of the last transfer of property that was part of the like-kind exchange.
- Any disposition after the earlier of the death of the taxpayer or the related party.
- Any disposition in a compulsory or involuntary conversion under §1033 provided the exchange occurred before the threat of conversion.
- Any disposition in which either the exchange or later disposition had as one of its principal purposes the avoidance of tax.
If it is part of a transaction or series of transactions structured to avoid the related party exchange rule.
A Section 1031 exchange.
Another partnership, individual, or other entity.
It is to start the statute of limitations running against the IRS.
Schedule D or Form 4797.
Form 8824.
- Descriptions of the properties.
- Date of disposition of taxpayer’s property.
- Dates of identification and acquisition of the replacement property.
- Certain related-party information.
Test your Knowledge
X. Section 1031 Exchange (Mechanics)
The napkin test.
If you exchange for like-kind property and are down in value, you are potentially taxable as to such trade down; and
If you exchange for like-kind property and are down in equity, you are potentially taxable as to such trade down.
Fair Market Value (F.M.V.).
Existing Encumbrances (M.T.G.); and
Equity (E.Q.).
That all parties get the same in value as they give.
Evening out,” “balancing,” or “sweetening” the deal.
Reduce EQUITY by increasing debt.
Reduce EQUITY by taking away an asset.
Increase EQUITY by reducing debt.
Increase EQUITY by adding an asset.
Reduce VALUE by taking away an asset.
Increase VALUE by adding an asset.
Locating boot.
Bringing together suitable exchange properties and persons interested in trading.
A market value equal to or greater than the owner’s property, and
A net equity equal to or greater than the owner’s equity in his or her property.
Trade-up rule and exchange groups.
Use the proceeds of your refinancing to purchase another real estate, or use the proceeds of the refinancing to make a capital improvement to the property.
Generate cash to acquire suitable exchange property or to balance equities.
The excess of the wrap-around above the existing encumbrance on the property will almost always constitute property boot and, thus, be taxable.
An after-created equity or pay down agreement.