570 Notes, 13-1
CHAPTER 13
PROPERTY TRANSACTIONS –
GAIN/LOSS, BASIS, NONTAXABLE EXCHANGES
(Subchapter O, §§ 1001- 1092)
I.
Dispositions - Determining Gain or Loss (§1001)
+
A.
Amount Realized:
+
cash received
+
FMV of property received
+
decrease in seller’s liabilities
-
costs of sale (e.g., commissions)
+/-
other items (e.g., property tax adjustments)
-
B.
Adjusted Basis (see Concept Summary 13-2 in text)
original basis
+
capital improvements
recoveries (e.g., depreciation “allowed or allowable;”
bond premium amortization)
=
C.
Realized Gain or Loss
?
D.
Recognized Gain or Loss
II.
1.
May or may not be the realized gain or loss.
2.
Not recognized:
3.
Postponed
Basis and Holding Period
A. Why important?
1.
Basis
2.
Holding Period
a.
Rule of thumb
570 Notes, 13-2
III. Basis Calculation Formulas (§§1011-1023)
Method of acquisition
Calculation formula
1. Purchase
Cost
2. Taxable exchange
3. Nontaxable exchange
Fair market value
Basis of qualifying property transferred
+ Basis of boot transferred
+ Gain recognized
– Loss recognized
– Fair market value of boot received
or
Fair market value of qualifying property received
– Postponed gain (i.e., gain not recognized)
+ Postponed loss (i.e., loss not recognized)
Gain or regular basis
Donor’s basis
+ Gift tax paid on the appreciation*
4. Gift
5. Inheritance
2010
Loss basis
Lower of: Gain basis or
Fair market value at the date of the gift
- Step-up (FMV) on $1.3m ($3m add’l for
transfers to spouse)
- Excess same as gift basis
After
2010
6. Converting personal
use property to business
use
Fair market value at the primary (or alternate)
valuation date
Gain basis
Original basis
Loss & depreciation basis
Lower of: Original basis or
Fair market value at the date of conversion
7. Leasehold
Improvements made by
lessee
If in lieu of rent, basis = amount recognized as
income in lieu of rent.
If not in lieu of rent (not taxable to lessor), basis
= 0.
Holding Pd
Starts
570 Notes, 13-3
IV. Demo Examples of Basis Calculation:
1. Stock Dividends Example: You own 1,000 shares of X stock with a basis of $10,000
and a FMV of $15,000. You receive 100 shares in a stock dividend distribution.
- If Nontaxable:
- If Taxable:
2.
3.
Stock Rights Example: You own 1,000 shares of ABC common stock with a basis of
$10,000 and a FMV of $20,000. 1,000 rights, worth $5 each ($5,000 total) allow you
to purchase 1,000 shares of stock at $15 per share.
- Allocation of a nontaxable stock right received is mandatory only if the right has a
FMV  15% of the FMV of the underlying stock.
Basic Exchange Examples: Old asset (adjusted basis = $15,000, FMV = $17,000)
and $10,000 cash given for new asset worth $27,000.
- If Nontaxable:
- If Taxable:
4.
Gift Example #1 : Donor basis = $30,000, FMV = $50,000. Donor pays $10,000 gift
tax. Donee basis =
5.
Gift Example #2: Donor basis = $50,000, FMV = $30,000. Donor pays $6,000 gift
tax. Donee basis =
570 Notes, 13-4
6.
Inherited Property Example: Joe owns property with a basis of $100,000 and a FMV
of $150,000 on the date of Joe’s death. The property has a FMV of $140,000 six (6)
months after Joe’s death. Ann inherits the property.
- Normal valuation date:
- Alternate valuation date:
- Suppose Ann is Joe’s spouse, the property is jointly-owned, and they live in (use the
normal valuation date):
- a community property state
- a common law state
Sooooo, let’s talk about gift vs. inherited property. Which is better from the recipient’s
point of view?
A note on deathbed gifts (Appreciated property gifted to someone who dies within 1 year of
the gift and bequests the property back to the donor.)
7.
Personal to Business Conversion Example: Convert personal residence (basis =
$80,000, FMV = $70,000) to rental house.
8.
Related Party Loss Sale Example: Father sells stock (basis = $20,000) to daughter for
$15,000. Daughter later sells stock to unrelated party for –
- $22,000
- $16,000
- $13,000
570 Notes, 13-5
V. Like-Kind Exchanges (§1031)
A. General Rule.
1. NO GAIN OR LOSS recognized on an exchange of like-kind property
 EXCEPTION –GAIN recognized if boot is received.
2. Property must be held for investment or for use in a trade or business. The like-kind
exchange treatment is mandatory if the transaction meets the statutory requirements.
B. Like-Kind Property Defined
1. Exchanged property must be of the same class (i.e. personal property for personal and
real property for real). Personal property be within the same General Business Asset
Class or within the same Product Class.
2. Certain property (inventory and securities) does not qualify for like-kind exchange
treatment.
C. Receipt of Boot
1. Gain is recognized to the extent of boot received, limited by the realized gain. No loss
is ever recognized on a like-kind exchange.
2. Boot is any kind of non-qualifying property (i.e. cash and relief of mortgage liability,
any asset that is not like-kind).
3. If both properties are encumbered with debt, the mortgages are offset to determine if
there is net boot.
D. EXAMPLES
1. A and B exchange like-kind property. A's has a FMV of $240,000 and a basis of
$500,000; B's has a FMV of $440,000, a basis of $300,000, and is subject to a debt of
$200,000, which A assumes.
A
B
Rec’d: (FMV)
Gave: (Basis)
G(L) Realized:
G(L) Recognized:
Basis of new property:
570 Notes, 13-6
2. A and B exchange like-kind property. A's has a FMV of $220,000, a basis of $135,000,
and is subject to a $160,000 debt; B's has a FMV of $180,000, a basis of $300,000, and is
subject to a $120,000 debt. An even swap is made, subject to the debts.
A
B
Rec’d: (FMV)
Gave: (Basis)
G(L) Realized:
G(L) Recognized:
Basis of new property:
3. A and B exchange real property. A gives up a building with a FMV of $160,000 and a
basis of $54,000. B gives up a building with a FMV of $140,000 and a basis of
$128,000. B also gives up stock with a FMV of $20,000 and a basis of $12,000.
A
Rec’d: (FMV)
Gave: (Basis)
G(L) Realized:
G(L) Recognized:
Basis of new property:
B
570 Notes, 13-7
VI. Involuntary Conversions (§1033)
A. General Rule.
1. Gains from involuntary conversions are deferred if the full amount of the proceeds is
invested in qualifying replacement property within a certain period and an election is
made to defer the gain.
2. Losses on involuntary conversions are fully recognized.
B. Involuntary Conversion Defined
1. Involuntary conversions include theft, seizure, requisition, condemnation, or destruction
of property.
C. Determination of Gain and Basis
1. Recognized Gain (limited to realized gain) =
Proceeds (insurance recovery or government condemnation proceeds)
> Cost of replacement property
2. EXAMPLE: A taxpayer receives $500,000 of insurance proceeds from an involuntary
conversion; basis in the property was $300,000. Replacement property was purchased
for $450,000.
D. Replacement Property
1. Generally, replacement property is required to be similar or related in service or use to
the converted property.
2. If real property used in a trade or business or held for investment is condemned, it may
be replaced under the less restrictive like-kind standard.
E. Time Requirements for Replacement
1. The normal replacement period is two years after the end of the tax year in which the
involuntary conversion gain is realized.
2. Condemned real property can be replaced within three years after the end of the tax year
in which the involuntary conversion gain is realized.
570 Notes, 13-8
VII.
Sale of Principal Residence by Individuals - Exclusion of Gain (§121)
A. Exclusion of gain up to $250,000 ($500,000 for married, joint returns).
B. Requirements:
1. Must have owned and used the property as a principal residence for at least 2 years
during the 5-year period ending on the date of sale.
2. Exclusion allowed on each sale, but no more than once every 2 years.
3. Exception to the use and limit of once every 2 years: Prorated exclusion allowed if
either of the 2-year requirements not met if caused by reason of a change in place of
employment, health, or other unforeseen circumstances.
Exclusion Ratio =
Shorter of: (1) Actual ownership & use; or (2) time since most recent excluded sale
2 years
Example: Mr. and Ms. Jones purchased and occupied a principal residence in 2010.
Exactly one year later, Ms. Jones is transferred by her employer to another city and the
Jones move. The sell their home at a $200,000 gain. What is their exclusion?
4. Exception for “nonqualified use,” defined as any period of time after 2008 that the
house is not used as the principal residence.
Example: Bob buys a second home January 1, 2005, then moves into it as his principal
residence on January 1, 2011, and sells it on January 1, 2013. He meets the 2-out-of-5 year requirement, but 2 years of ownership (2009 and 2010) is not qualified use, so twoeighths of any gain is not eligible for the exclusion.
4. Rules for married individuals:
a. MFJ taxpayers can exclude up to $500,000 if (1) either meets the ownership test; (2)
both meet the use test; and (3) neither is ineligible because of a prior sale within 2 years.
b. On the other hand, each spouse can exclude $250,000. Thus, if H marries W, who
sold her home in the prior year, H could still get a $250,000 exclusion.
5. Depreciation recapture occurs for any business use of the home for periods after 5/6/97.
570 Notes, 13-9
SUMMARY SHEET – NONRECOGNITION TRANSACTIONS
Transaction
Sales of Personal Assets
Do Not Recognize
Losses
When It Applies
A person sells personal-use property at a
loss, such as a house or jewelry.
Wash Sales
Losses
A person acquires stock within 30 days of
selling the same stock at a loss.
Sales to a Related Party
Losses
A person sells property at a loss to a
related party, which includes:
 Parent, grandparent, child, grandchild,
spouse, or sibling
 Majority-owned corporation
 Majority-owned partnership
Like-Kind Exchanges


A person exchanges business real property
for other business real property, or
business personal property for other
business personal property in the same
product class.
Involuntary Conversions
Gain is recognized only A person who lost property due to a
to the extent that a
casualty, theft, or condemnation, if:
person reinvests less in  A similar replacement property is
a replacement property
purchased within 2 years from the end
than the proceeds
of the year in which the casualty or
received from the
theft occurred (3 years if
original property.
condemnation)
 An appropriate election to not report
the gain is filed.
Installment Sales
A portion of the overall
gain is recognized only
as a person collects
cash each year, as
follows:
Losses
Gain is recognized
only to the extent
that “boot” is
received
A person sells property for periodic
installment payments
Gain x Cash Collected
Total Sales Price
Sale of a Principal
Residence
Up to $250,000 or
reportable gain is not
recognized ($500,000
on a joint return)
Lived in the home for at least 2 of the
prior 5 years