Exchange of Like-Kind Property
Upon the sale or exchange of property, a taxpayer realizes a gain or loss but the recognition of the gain or loss may be deferred for tax purposes. A gain or loss can be deferred, for example if a taxpayer exchanges property for other property of a like kind. Under other circumstances the transaction may be nontaxable.
“Like-kind property” does not include inventory, stocks, bonds, or other securities. A like-kind exchange must involve real estate for real estate, or personal property for personal property of a like kind or class. Examples of different classes of personal property are office furniture and equipment, airplanes, computers and peripheral equipment, trucks and automobiles. The exchange of office furniture for a computer, for instance, will not qualify as a like-kind exchange. The like-kind exchange rule is not elective. Taxpayers must use the provision if a transaction qualifies as a like-kind exchange, regardless of whether the transaction results in a realized gain or a realized loss.
To qualify as nontaxable, the property exchanged must be held for productive use in a trade or business or for investment. Property held for personal purposes, like a taxpayer’s residence, will not qualify for a like-kind exchange. When an exchange involves only qualified like-kind property, no gain or loss is recognized. Some exchanges, however, include cash or other property in addition to the like-kind property.
If an exchange is not solely for like-kind assets, the nontaxable treatment often is not completely lost. Gain is recognized in an amount equal to the lesser of (1) the gain realized, or (2) the “boot” received. BootbootCash, property, or debt relief received in addition to the main property in a sale or exchange. is money or the fair market value of other property received in addition to the like-kind property. Relief from a debt is the same as receiving cash and is treated as boot.
When other property is received as boot in an exchange, the basis of the property received is its fair market value on the date of the exchange. The basis of the like-kind property received is:
| The basis of the like-kind property given up | |
|---|---|
| + | Any boot paid |
| − | Any boot received |
| + | Any gain recognized |
| = | Basis of property received |
The holding period for property acquired in a like-kind exchange includes the holding period of the property exchanged. For example, if long-term capital gain property is exchanged today, the new property may be sold immediately, and the gain recognized would be long-term capital gain.
Taxpayers file Form 8824, Like-Kind Exchanges, to report the exchange of property. This form must be completed even if no gain is recognized.
Example
Rob and Ross exchange real estate held as an investment. Rob gives up property with an adjusted basis of $920,000 and a fair market value of $1,205,000. The property is subject to a mortgage of $600,000, which is assumed by Ross. In return for this property, Rob receives from Ross property with a fair market value of $540,000 and cash of $65,000. Ross’s adjusted basis in the property he exchanges is $360,000.
Rob recognizes a gain of $285,000, equal to the lesser of the gain realized or the boot received as calculated below.
Calculation of gain realized: FMV of property received $540,000 Cash received 65,000 Liability assumed by Ross 600,000 Total amount realized $1,205,000 Less: the adjusted basis of the property given up (920,000) Gain realized $285,000 Calculation of boot received: Cash received $ 65,000 Liability assumed by Ross 600,000 Total boot received $665,000 The basis of Rob’s property is calculated below
Basis of the property given up $920,000 + Boot paid 0 − Boot received (665,000) + Gain recognized 285,000 Basis of the like-kind property received $540,000 Ross’s recognized gain is equal to the lesser of the gain realized or the boot received. Since he received no boot the recognized gain is zero.
Calculation of gain realized: FMV of property received $1,205,000 Less: Boot paid ($600,000 + 65,000) (665,000) Less: Adjusted basis of property given up (360,000) Gain realized $180,000 Boot received: 0 The basis of Ross’s new property is calculated below
Basis of the property given up $360,000 + Boot paid 665,000 − Boot received 0 + Gain recognized 0 Basis of the property received $1,025,000
Go to Publication 17 and read chapter 14: Sale of Property.
Questions and Problem
Carrie and Chris traded property in a qualifying like-kind exchange. Carrie gave up property with an adjusted basis of $39,000 (FMV of $42,000) in exchange for Chris’s property with a FMV of $34,000 plus $8,000 cash. How much gain should Carrie recognize on the exchange?
$3,000
$2,000
$1,000
$0
None of the above
Carrie and Chris traded property in a qualifying like-kind exchange. Carrie gave up property with an adjusted basis of $39,000 (FMV of $42,000) in exchange for Chris’s property with a FMV of $34,000 plus $8,000 cash. What is Chris’s basis in the equipment received in the exchange assuming her basis in the equipment given up was $32,000?
$34,000
$39,000
$40,000
$42,000
None of the above
Kellin trades real estate for other real estate in a qualifying like-kind exchange. Kellin’s basis in the real estate given up is $205,000 (FMV of $270,000). Kellin receives real estate with a FMV of $150,000 and cash of $70,000. In addition, the other party to the trade assumes Kellin’s mortgage of $50,000.
Calculate Kellin’s recognized gain, if any, on the exchange. $________
Calculate Kellin’s basis in the property received. $________
