Chapter 11       Property Transactions:     Nonrecognition of Gains and               Losses©2012 CCH. All Rights Reserved...
Chapter 11 Exhibits    1.   Sale of a Principal Residence    2.   Sale of Home by Divorced or Separated Taxpayers    3.   ...
Chapter 11 Exhibits    10.   Involuntary Conversions—What Qualifies    11.   Involuntary Conversions—Rules    12.   Involu...
Sale of a Principal Residence    Amount and tax effect of the exclusion        $250,000 (Married individuals filing joint...
Sale of a Principal Residence Qualifying for the exclusion     Own and use the property as a principal residence for an  ...
Sale of Home by Divorced or Separated                           Taxpayers     Ownership: If a residence is transferred to ...
Sale of Home Due to Unforeseen Circumstances       If a change in place of employment, health, or other       unforeseen c...
Like-Kind Exchanges—                        Tax Treatment for Gain or Loss     Mandatory Rule     Code Section 1031 No gai...
Like-Kind Exchanges—Tangible Property    What qualifies as a like-kind exchange?   Real property for real property is OK....
Like-Kind Exchanges—Boot    Boot is property exchanged that is not like-kind (for example,    cash or relief of mortgage l...
Like-Kind Exchanges—Assumption of Liabilities     If a liability (i.e. mortgage) is assumed by the transferee, the     ass...
Like-Kind Exchanges—Time Limitations       Time Limitation       Two time limitations govern like-kind exchanges under the...
Like-Kind Exchanges—Holding Period Rules The holding period of like-kind property and boot are:1. Like-kind property recei...
Involuntary Conversions—What Qualifies     Qualified Events     Code Sec. 1033 applies to involuntary conversions occurrin...
Involuntary Conversions—What Qualifies      Qualifying Like-Kind Property      Code Sec. 1033 is more restrictive than Cod...
Involuntary Conversions—Rules    Mandatory Rules    1.     If the award is like-kind property (not cash), no gain is recog...
Involuntary Conversions—Rules  Elective Rules     1. If the cost of replacement property exceeds the amount realized  (i.e...
Involuntary Conversions—Time Limitations      Two time limitations govern like-kind replacement of      involuntary conver...
Involuntary Conversions—Time Limitations  2. Latest date to replace involuntary conversion. Like-kind     property must be...
Involuntary Conversions—Holding Period Rules         The holding period of like-kind property and boot are the         sam...
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2013 cch basic principles ch11

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2013 cch basic principles ch11

  1. 1. Chapter 11 Property Transactions: Nonrecognition of Gains and Losses©2012 CCH. All Rights Reserved.4025 W. Peterson Ave.Chicago, IL 60646-60851 800 248 3248www.CCHGroup.com
  2. 2. Chapter 11 Exhibits 1. Sale of a Principal Residence 2. Sale of Home by Divorced or Separated Taxpayers 3. Sale of Home Due to Unforeseen Circumstances 4. Like-Kind Exchanges—Tax Treatment for Gain or Loss 5. Like-Kind Exchanges—Tangible Property 6. Like-Kind Exchanges—Boot 7. Like-Kind Exchanges—Assumption of Liabilities 8. Like-Kind Exchanges—Time Limitations 9. Like-Kind Exchanges—Holding Period RulesChapter 11, Exhibit Contents A CCH Federal Taxation Basic Principles 2 of 20
  3. 3. Chapter 11 Exhibits 10. Involuntary Conversions—What Qualifies 11. Involuntary Conversions—Rules 12. Involuntary Conversions—Time Limitations 13. Involuntary Conversions—Holding Period RulesChapter 11, Exhibit Contents B CCH Federal Taxation Basic Principles 3 of 20
  4. 4. Sale of a Principal Residence Amount and tax effect of the exclusion  $250,000 (Married individuals filing jointly may exclude up to $500,000.)  This is a permanent exclusion, not just a deferral or rollover of gain until a later time. Moreover, there is no reinvestment requirement.Chapter 11, Exhibit 1a CCH Federal Taxation Basic Principles 4 of 20
  5. 5. Sale of a Principal Residence Qualifying for the exclusion  Own and use the property as a principal residence for an aggregate of at least two of the five years preceding the sale or exchange and,  Not claim the exclusion during the two years immediately preceding the sale.Chapter 11, Exhibit 1b CCH Federal Taxation Basic Principles 5 of 20
  6. 6. Sale of Home by Divorced or Separated Taxpayers Ownership: If a residence is transferred to a taxpayer under a divorce or separation instrument, the time during which the taxpayer’s spouse or former spouse owned the residence is added to the taxpayer’s period of ownership. Use: A taxpayer who owns a residence is deemed to have occupied it as a principal residence while the taxpayer’s spouse or former spouse is given use of the residence under the terms of a divorce separation.Chapter 11, Exhibit 2 CCH Federal Taxation Basic Principles 6 of 20
  7. 7. Sale of Home Due to Unforeseen Circumstances If a change in place of employment, health, or other unforeseen circumstances precipitate a sale or exchange before any the exclusion requirements are satisfied, the exclusion may be prorated. The amount of gain that may be excluded is calculated the lesser of: 1. number of months of ownership and use or 2. number of months since the previous sale. Divide (1) or (2) by 24 months and multiply by the maximum exclusion ($250,000 single or $500,000 married filing jointly)Chapter 11, Exhibit 3 CCH Federal Taxation Basic Principles 7 of 20
  8. 8. Like-Kind Exchanges— Tax Treatment for Gain or Loss Mandatory Rule Code Section 1031 No gain or loss is recognized on the exchange of trade, business or investment use property if such property is exchanged SOLELY for like-kind property. Deferral of any remaining gain or loss is mandatory, not elective. Recognized gain is the lesser of: 1. Realized gain 2. Net boot receivedChapter 11, Exhibit 4 CCH Federal Taxation Basic Principles 8 of 20
  9. 9. Like-Kind Exchanges—Tangible Property What qualifies as a like-kind exchange? Real property for real property is OK. Tangible personal for tangible personal may be OK, if the assets fall within the same asset class. Personal property for real property, or vice versa, is NOT OK Inventory for anything is NOT OK. Personal-use property for anything is NOT OK.Chapter 11, Exhibit 5 CCH Federal Taxation Basic Principles 9 of 20
  10. 10. Like-Kind Exchanges—Boot Boot is property exchanged that is not like-kind (for example, cash or relief of mortgage liability) When boot is received, realized gains are recognized to the extent of boot received. Recognized gains cannot exceed realized gains. Losses are not recognized in boot received situations. When boot is given, gains and losses are recognized (regardless of the amount realized) when the FMV of the boot is different from its basis. It’s like the boot is sold separately from the like-kind property.Chapter 11, Exhibit 6 CCH Federal Taxation Basic Principles 10 of 20
  11. 11. Like-Kind Exchanges—Assumption of Liabilities If a liability (i.e. mortgage) is assumed by the transferee, the assumption is treated like boot received by the transferor. The transferor will recognize gain to the extent of boot received (not to exceed realized gain). It is treated as if the transferor received cash and then paid off the liability. If the transferor also assumes a liability, the assumption is treated like boot given and may offset the amount of liabilities treated as boot received.Chapter 11, Exhibit 7 CCH Federal Taxation Basic Principles 11 of 20
  12. 12. Like-Kind Exchanges—Time Limitations Time Limitation Two time limitations govern like-kind exchanges under the Starker rule (named after a landmark court case): 1. Identification requirement. Like-kind property to be received must be identified within 45 days of the date that the like-kind property is given. 2. Receipt requirement. Like-kind property must be received within 180 days of the date that the like-kind property is given.Chapter 11, Exhibit 8 CCH Federal Taxation Basic Principles 12 of 20
  13. 13. Like-Kind Exchanges—Holding Period Rules The holding period of like-kind property and boot are:1. Like-kind property received. Same as the holding period of the like-kind property given.2. Boot received. Begins on the day following the day of receipt.Chapter 11, Exhibit 9 CCH Federal Taxation Basic Principles 13 of 20
  14. 14. Involuntary Conversions—What Qualifies Qualified Events Code Sec. 1033 applies to involuntary conversions occurring through casualty, theft or condemnation. A casualty qualifies for special tax treatment if it is caused by some sudden event such as fire, storm or shipwreck. A condemnation qualifies if there is confirmation that property is going to be taken for public purposes. News reports are not deemed to be confirmations.Chapter 11, Exhibit 10a CCH Federal Taxation Basic Principles 14 of 20
  15. 15. Involuntary Conversions—What Qualifies Qualifying Like-Kind Property Code Sec. 1033 is more restrictive than Code Sec. 1031, except for the replacement of condemned real property. Generally, Code Sec. 1033 replacement property must be used in substantially the same way as the involuntary conversion property. Real for real is not always OK; (e.g., timberland - a bowling alley, unless one of the real properties had been condemned. Only condemned real property gets the same like-kind flexibility afforded Code Sec. 1031 property) Personal for personal is not always OK; (e.g., delivery truck - business car is NOT OK; however a delivery truck for a delivery truck, or a business car for a business car, is OK.)Chapter 11, Exhibit 10b CCH Federal Taxation Basic Principles 15 of 20
  16. 16. Involuntary Conversions—Rules Mandatory Rules 1. If the award is like-kind property (not cash), no gain is recognized. Basis of replacement property equals adjusted basis of old property. 2. Realized losses must be recognized (if allowed). The basis of replacement property is its cost. Losses from business or income producing property are recognized. Losses from casualty or theft of personal-use property are recognized. Losses from condemnation of personal use property are NOT recognized.Chapter 11, Exhibit 11a CCH Federal Taxation Basic Principles 16 of 20
  17. 17. Involuntary Conversions—Rules Elective Rules 1. If the cost of replacement property exceeds the amount realized (i.e., cash received) an election may be made to defer all of the gain. 2. If the amount realized exceeds the cost of the replacement property, the taxpayer may make an election to recognize gain for the amount in excess. In a situation where a gain occurs from the involuntary conversion of a principal residence, the amount realized is reduced by the gain excluded (up to $500,000 married filing jointly or $250,000 single) The basis of replacement property is its cost less deferred gain.Chapter 11, Exhibit 11b CCH Federal Taxation Basic Principles 17 of 20
  18. 18. Involuntary Conversions—Time Limitations Two time limitations govern like-kind replacement of involuntary conversions property: 1. Earliest date to replace involuntary conversion. The earlier of: (a) Date of disposition of the involuntary conversion property; or (b) Earliest date of threat of disposition. (Note that casualties and thefts occur "suddenly," therefore (b) would apply only to condemnations.)Chapter 11, Exhibit 12a CCH Federal Taxation Basic Principles 18 of 20
  19. 19. Involuntary Conversions—Time Limitations 2. Latest date to replace involuntary conversion. Like-kind property must be received or purchased: (a) Condemned real property. Within 3 years after the end of the taxable year in which gain is first realized. (b) All other qualified property. Within 2 years after the end of the taxable year in which gain is realized for: (i) Real casualty or theft property; (ii) Personal property.Chapter 11, Exhibit 12b CCH Federal Taxation Basic Principles 19 of 20
  20. 20. Involuntary Conversions—Holding Period Rules The holding period of like-kind property and boot are the same as under Code Sec. 1031: 1. Like-kind property received. Same as holding period of the involuntarily-converted property. 2. Non like-kind property received. Begins on the day following the date of receipt.Chapter 11, Exhibit 13 CCH Federal Taxation Basic Principles 20 of 20

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