CPA Regulation (REG) : Like Kind Exchanges

Example Questions

Example Question #1 : Like Kind Exchanges

A taxpayer owned land with a basis of $120,000, subject to a mortgage of$75,000. The taxpayer exchanged the land held for another parcel of land with a fair market value of $200,000 plus cash of$35,000, and the taxpayer was relieved of the mortgage on the relinquished land. The transaction qualified for like-kind exchange treatment. What amount of taxable gain will be recognized on the taxpayer's tax return for this exchange?

$115,000$110,000

$190,000$35,000

$110,000 Explanation: The taxpayer’s realized gain is$190,000 ($200,000 FMV of building +$35,000 cash + $75,000 mortgage relief -$120,000 basis in property exchanged). Total boot received is $110,000 ($35,000 cash + $75,000 mortgage relief). In like-kind exchange transactions where boot is received, the gain recognized is the lesser of the realized gain ($190,000) or the boot received ($110,000), and here the lesser is the$110,000 of boot.

Example Question #2 : Like Kind Exchanges

In a “like-kind” exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of:

Partnership interests

Convertible debentures

Convertible preferred stock

Rental real estate located in different states

Rental real estate located in different states

Explanation:

To qualify for like-kind exchange treatment, both properties must be real property for business or investment. Only the rental real estate meets this criteria.

Example Question #3 : Like Kind Exchanges

Savage exchanged business-use real property having an original cost of $100,000 and accumulated depreciation of$30,000 for business-use real property owned by Cantor having a fair market value of $80,000 plus$1,000 cash. Cantor assumed a $2,000 outstanding debt on the real property. What taxable gain should Savage recognize? Possible Answers:$10,000

$0$3,000

$11,000 Correct answer:$3,000

Explanation:

Savage’s realized gain is $13,000 ($80,000 FMV of property + $1,000 cash +$2,000 debt relief - $70,000 basis in property exchanged). Total boot received is$3,000 ($1,000 cash +$2,000 debt relief). In like-kind exchange transactions where boot is received, the gain recognized is the lesser of the realized gain ($13,000) or the boot received ($3,000), and here the lesser is the \$3,000 of boot.

Example Question #4 : Like Kind Exchanges

In a like kind exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of:

Rental real estate located in different states

Convertible debentures

Convertible preferred stock

Partnership interests

Rental real estate located in different states

Explanation:

No taxable gain or loss will be recognized on a like kind exchange if both assets are real estate property. Rental real estate located in different states qualifies for a like kind exchange.

Example Question #5 : Like Kind Exchanges

An individual entered into several exchanges during the current tax year. Which of the following exchanges is classified as like kind?

Common stock for common stock

Apartment building for unimproved land

Partnership interest for partnership interest

Manufacturing equipment for factory building

Apartment building for unimproved land

Explanation:

Real property exchanged for other real property will be classified as a like kind exchange.

Example Question #6 : Like Kind Exchanges

If both assets in a like-kind exchange transaction are ________, no taxable gain or loss will be recognized.

Warrants

Interest in a legal entity

Real estate property

Convertible stock