Special Property Tax Transactions – Lesson 2


Next one, this is called a “like-kind exchange,”
and this happens a lot in the real world. You own rental property and you trade it in
for another rental property, or you basically take it, sell it, take the money, reinvest,
and buy another one. This is called the “1031 exchange.”
It says “When tangible investment or business property,” not intangible, it’s like stock,
“is exchanged for similar property, called a like-kind exchange 1031, neither a gain
or loss is reported unless the taxpayer receives monetary consideration which we’ll call ‘boot’
as part of the exchange. If boot is received a gain for the excess of the fair value over
the tax basis of the property relinquished is recognized up to a maximum of the boot
received.” What is boot? Don’t confuse boot with booty,
huh, booty! Don’t confuse it. Boot would be cash or unlike or dissimilar property. It
says here “Cash, unlike property, debt relief.” What that means is relief from debt that exceeds
debt assumed. For example, in most of these questions, when
they test them it says that I’m giving you a property, you’re giving me a property. My
property is subject to a mortgage of 100. Your property is subject to a mortgage of
40. I owed 100, I only owe 40. Net debt relief is 60, that’s considered boot, so that would
get added in to see what my amount is. It says here, “It has to be the same nature
and character like real for real, or personal for personal. No loss deduction. The gain
is the lesser of the cash plus the unlike property received, or the realized gain.”
So we’re going to use two words here called “a realized gain,” versus “a recognized gain.”
So it will be the lower of what we calculated the realized gain or the amount of boot that
you received which would be the cash, the unlike property, and the relief from debt,
the debt relief. All right, for example, assume that the taxpayer
owned real estate with a basis of $200,000 and a fair market value of five, and that
was exchanged for other real estate with a fair value of four. In addition, the taxpayer
was relieved of a mortgage on the old of 150, but assumed a mortgage on the new of 80, and
received $30,000 in cash. Okay, so let’s see what’s happening here as
far as the amounts. Okay, so it says again the basis of 200 and a fair value of five.
So I have a basis of two, fair value of five. This is in exchange for other real estate
with a fair value of four, in addition … Okay, so what we have to look at is what’s the fair
market value of the new and that is 400, plus how much is the boot that is received and
in looking at the boot what it’s going to be is it’s going to be any cash, any dissimilar
assets, any net debt relief. So it’s going to be cash, net debt relief, and any other
types of assets that are received. So in this case I got $30,000 cash. As far
as the debt I owed 150. The new mortgage I believe was 80 so I have net debt relief of
70. So that’s 100 equals 500 that is how much the amount is realized. That’s what I have
realized, so the amount received. I’m going to take away the book value of the old which
in this case was 200. That gives me a gain of 300.
Now, this gain is called a “realized gain.” Now remember what are we going to do? We’re
going to book it for the lower of the realized gain or the recognized gain. What is lower?
The realized gain of 300 or the recognized? How much do we recognize? You recognize the
lower of the realized, or the boot received. So what’s lower? 300 or 100? 100, okay.
Now this is a little different than what we do for book purposes because remember when
we talked about it used to be called like versus unlike, or similar versus dissimilar,
and in financial accounting they changed the terminology to “commercial substance,” or
“lacking commercial substance.” Kind of remember that? And what we had to do is we had to do
a funky formula. What we did there is the following. It was different, but for what
we say here is we say one over five is 20 percent. You recognize 20 percent of the gain
or 60 bucks. Because what we say is we recognize one-fifth or 20 percent of the proceeds is
boot, therefore, you recognize 20 percent of the gain.
That’s what you do for financial accounting purposes. We don’t care about that. What do
you do here for tax? For tax it’s the lower of the realized gain, or the boot received.
So they’ll ask you what’s realized, or what’s recognized? R-e-c-o-g-n-i-z-e-d. What’s recognized?
The lower of the two, 100 bucks.

One Reply to “Special Property Tax Transactions – Lesson 2”

  1. 1. Individual A traded his farm (basis $100,000, FMV $450,000) and a tractor (basis $10000, FMV $10,000) for Individual B's warehouse (basis $150,000). A also assumed B's mortgage of $200,000.
    FMV of Warehouse=660,000

    i got the realized gain of A: 350.00 B:510,000
    but i can calculate the recognized gain of A , B?
    and what is the new bias of farm, tractor and warehouse?

    2. Individual C traded an office building (basis $65,000, FMV $400,000) and $100,000 in cash for individual D's apartment building (basis $50,000). There is a $200,000 mortgage on the apartment building, and C will assume that mortgage
    this problem as well what is the realized and recognized gain ? new basic of office building and apartment?

    please help me to understand these problems
    thanks

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