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Business Taxation
University of Kansas School of Law
Dickinson, Martin B.

Problem 2

• §1031— Exchange of Property Held for Productive Use or Investment. Provides nonrecognition for exchange of like-kind property
o § 1031(a)—Nonrecognition of gain or loss from exchanges solely in kind: No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.
• §1031(a)(2)—Exceptions: doesn’t apply to several categories, including stocks, bonds, notes, other securities
o Must distinguish between simultaneous sales & true exchanges.
o Not enough for property to be similar. Properties must be (a) like-kind and (b) held for productive use or investment.
• § 1031(d)—Basis rule: Historical basis in relinquished property becomes new basis in replacement property (“substitute basis”). No gain recognized now—deferral provision.
• Reg. § 1.1031(d)-1(b) & (c) for illustrations of the basis calculations
• § 1031(b)—Boot rule: Boot is a colloquial term describing nonqualified consideration—anything other than the type of assets being exchanged (typically cash). If w/in §1031 except boot, then exchange falls w/in §1031 and we analyze the boot separately.
o A gain is recognized up to the amt of the boot and new basis is relinquished basis minus boot (plus any gain recognized)—§ 1031(d)
o Debt on the exchanged property is boot just as if the taxpayer received add’l money in the amt of the debt that is assumed in the exchange.
• § 1031(c)—Loss recognition/loss limitation rule— losses on exchanges with boot are not recognized.
Basic Calculation for Like-Kind Exchanges
• Basis of Property Transferred
• Plus Gain Recognized
• Minus FMV of boot received
• Minus Loss Recognized
• Plus Additional investment in property (boot paid)
• Equals Basis of Property Received in Exchange
o Note: boot received always takes a basis = to its FMV

Part A

Fred

Tanya

Assets Transferred

Farm

Ranch

Realized Gain/Loss

140,000

90,000

Recognized gain/loss

0

0

Basis for assets received
(other than money received)

60,000

110,000

Code Section

1031(d)

1031(d)

ss

$60,000

0

Recognized gain/loss

0

0

Basis for assets received
(other than money received)

$100,000

$40,000

Code Section

1031(d)

1012

Basis Calculation
• Basis of Property Transferred $100,000
• Plus Gain Recognized 0
• Minus FMV of boot received 0
• Minus Loss Recognized 0
• Plus Additional investment in property (boot paid) $40,000
• New Basis $140,000
• So if she was to sell farm later for $200,000 she would be taxed on $60,000 gain

Part C

• Farm
o FMV 200,000 basis 60,000
o Mortgage 25,000 basis 25,000
• Grove
o FMV 160,000 basis 100,000
• Cash
o FMV 40,000 basis 40,000