NOTE: This
is an IRS Publication
1. Gain or Loss
Table of Contents
-
Topics - This chapter discusses:
-
Useful Items - You may want to see:
-
Sales and Exchanges
-
Gain or Loss From Sales and Exchanges
-
Abandonment's
-
Foreclosures and Repossessions
-
Amount realized on a non-recourse debt.
-
Amount realized on a recourse debt.
-
Involuntary Conversions
-
Nontaxable Exchanges
-
Like-Kind Exchanges
-
Other Nontaxable Exchanges
-
Transfers to Spouse
-
Rollover of Gain From Publicly Traded Securities
-
Sales of Small Business Stock
-
Rollover of Gain From Sale of Empowerment Zone
Assets
-
Exclusion of Gain From Sale of DC Zone Assets
Topics - This chapter discusses:
-
Sales and exchanges
-
Abandonment's
-
Foreclosures and repossessions
-
Involuntary conversions
-
Nontaxable exchanges
-
Transfers to spouse
-
Rollovers and exclusions for certain capital
gains
Useful Items - You may want to see:
Publication
-
523
Selling Your Home
-
537
Installment Sales
-
547
Casualties, Disasters,
and Thefts
-
550
Investment Income and
Expenses
-
551
Basis of Assets
-
908
Bankruptcy Tax Guide
-
954
Tax Incentives for
Distressed Communities
Form (and Instructions)
-
Schedule D (Form 1040)
Capital Gains and
Losses
-
1040
U.S. Individual Income
Tax Return
-
1040X
Amended U.S. Individual
Income Tax Return
-
1099-A
Acquisition or
Abandonment of Secured Property
-
1099-C
Cancellation of Debt
-
4797
Sales of Business
Property
-
8824
Like-Kind Exchanges
See
chapter 5 for information about getting publications and
forms.
A
sale is a transfer of property for money or a mortgage,
note, or other promise to pay money. An exchange is a
transfer of property for other property or services. The
following discussions describe the kinds of transactions
that are treated as sales or exchanges and explain how
to figure gain or loss.
Sale or lease. Some
agreements that seem to be leases may really be
conditional sales contracts. The intention of the
parties to the agreement can help you distinguish
between a sale and a lease.
There is no test or group of tests to prove what
the parties intended when they made the agreement.
You should consider each agreement based on its own
facts and circumstances. For more information on
leases, see chapter 3 in Publication 535, Business
Expenses.
Cancellation of a lease. Payments
received by a tenant for the cancellation of a lease
are treated as an amount realized from the sale of
property. Payments received by a landlord (lessor)
for the cancellation of a lease are essentially a
substitute for rental payments and are taxed as
ordinary income in the year in which they are
received.
Copyright Payments you
receive for granting the exclusive use of (or right
to exploit) a copyright throughout its life in a
particular medium are treated as received from the
sale of property. It does not matter if the payments
are a fixed amount or a percentage of receipts from
the sale, performance, exhibition, or publication of
the copyrighted work, or an amount based on the
number of copies sold, performances given, or
exhibitions made. Nor does it matter if the payments
are made over the same period as that covering the
grantee's use of the copyrighted work.
If the copyright was used in your trade or
business and you held it longer than a year, the
gain or loss may be a section 1231 gain or loss. For
more information, see
Section 1231 Gains and Losses in chapter
3.
Easement The amount received
for granting an easement is subtracted from the
basis of the property. If only a specific part of
the entire tract of property is affected by the
easement, only the basis of that part is reduced by
the amount received. If it is impossible or
impractical to separate the basis of the part of the
property on which the easement is granted, the basis
of the whole property is reduced by the amount
received.
Any amount received that is more than the basis to
be reduced is a taxable gain. The transaction is
reported as a sale of property.
If you transfer a perpetual easement for
consideration and do not keep any beneficial
interest in the part of the property affected by the
easement, the transaction will be treated as a sale
of property. However, if you make a qualified
conservation contribution of a restriction or
easement granted in perpetuity, it is treated as a
charitable contribution and not a sale or exchange,
even though you keep a beneficial interest in the
property affected by the easement.
If you grant an easement on your property (for
example, a right-of-way over it) under condemnation
or threat of condemnation, you are considered to
have made a forced sale, even though you keep the
legal title. Although you figure gain or loss on the
easement in the same way as a sale of property, the
gain or loss is treated as a gain or loss from a
condemnation. See Gain or
Loss From Condemnations, later.
Property transferred to satisfy
debt. A transfer of property to satisfy a debt
is an exchange.
Note's maturity date extended.
The extension of a note's maturity date is not
treated as an exchange of an outstanding note for a
new and different note. Also, it is not considered a
closed and completed transaction that would result
in a gain or loss. However, an extension will be
treated as a taxable exchange of the outstanding
note for a new and materially different note if the
changes in the terms of the note are significant.
Each case must be determined by its own facts.
Transfer on death. The
transfer of property to an executor or administrator
on the death of an individual is not a sale or
exchange.
Bankruptcy. Generally, a
transfer of property from a debtor to a bankruptcy
estate is not treated as a sale or exchange. For
more information, see The
Bankruptcy Estate in Publication 908,
Bankruptcy Tax Guide.
Gain or Loss From Sales and
Exchanges
Gain or loss is usually realized when property is
sold or exchanged. A gain is the amount you realize
from a sale or exchange of property that is more
than its adjusted basis. A loss is the adjusted
basis of the property that is more than the amount
you realize.
Table 1-1. How To Figure Whether You Have a
Gain or Loss
|
IF your... |
THEN you have a... |
|
Adjusted basis is more than the amount
realized, |
Loss. |
|
Amount realized is more than the
adjusted basis, |
Gain. |
Basis. You must know the basis of your
property to determine whether you have a gain or
loss from its sale or other disposition. The
basis of property you buy is usually its cost.
However, if you acquired the property by gift,
inheritance, or in some way other than buying
it, you must use a basis other than its cost.
See Basis Other Than
Cost in Publication 551, Basis of
Assets.
Adjusted basis.
The adjusted basis of property is your
original cost or other basis plus certain
additions and minus certain deductions, such as
depreciation and casualty losses. See
Adjusted Basis
in Publication 551. In determining gain
or loss, the costs of transferring property to a
new owner, such as selling expenses, are added
to the adjusted basis of the property.
Amount realized. The
amount you realize from a sale or exchange is
the total of all money you receive plus the fair
market value (defined below) of all property or
services you receive. The amount you realize
also includes any of your liabilities that were
assumed by the buyer and any liabilities to
which the property you transferred is subject,
such as real estate taxes or a mortgage.
If the liabilities relate to an exchange of
multiple properties, see
Treatment of liabilities under
Multiple Property
Exchanges, later.
Fair market value.
Fair market value (FMV) is the price at which
the property would change hands between a buyer
and a seller when both have reasonable knowledge
of all the necessary facts and neither has to
buy or sell. If parties with adverse interests
place a value on property in an arm's-length
transaction, that is strong evidence of FMV. If
there is a stated price for services, this price
is treated as the FMV unless there is evidence
to the contrary.
Example.
You used a building in your business that
cost you $70,000. You made certain permanent
improvements at a cost of $20,000 and
deducted depreciation totaling $10,000. You
sold the building for $100,000 plus property
having an FMV of $20,000. The buyer assumed
your real estate taxes of $3,000 and a
mortgage of $17,000 on the building. The
selling expenses were $4,000. Your gain on
the sale is figured as follows.
Amount recognized. Your
gain or loss realized from a sale or exchange of
property is usually a recognized gain or loss
for tax purposes. Recognized gains must be
included in gross income. Recognized losses are
deductible from gross income. However, your gain
or loss realized from certain exchanges of
property is not recognized for tax purposes. See
Nontaxable Exchanges,
later. Also, a loss from the sale or
other disposition of property held for personal
use is not deductible, except in the case of a
casualty or theft.
Interest in property. The
amount you realize from the disposition of a
life interest in property, an interest in
property for a set number of years, or an income
interest in a trust is a recognized gain under
certain circumstances. If you received the
interest as a gift, inheritance, or in a
transfer from a spouse or former spouse incident
to a divorce, the amount realized is a
recognized gain. Your basis in the property is
disregarded. This rule does not apply if all
interests in the property are disposed of at the
same time.
Example 1.
Your father dies and leaves his farm to you
for life with a remainder interest to your
younger brother. You decide to sell your
life interest in the farm. The entire amount
you receive is a recognized gain. Your basis
in the farm is disregarded.
Example 2.
The facts are the same as in Example 1,
except that your brother joins you in
selling the farm. The entire interest in the
property is sold, so your basis in the farm
is not disregarded. Your gain or loss is the
difference between your share of the sales
price and your adjusted basis in the farm.
Canceling a sale of real
property If you sell real property
under a sales contract that allows the buyer to
return the property for a full refund and the
buyer does so, you may not have to recognize
gain or loss on the sale. If the buyer returns
the property in the year of sale, no gain or
loss is recognized. This cancellation of the
sale in the same year it occurred places both
you and the buyer in the same positions you were
in before the sale. If the buyer returns the
property in a later tax year, however, you must
recognize gain (or loss, if allowed) in the year
of the sale. When the property is returned in a
later year, you acquire a new basis in the
property. That basis is equal to the amount you
pay to the buyer.
If you sell or exchange property for less than
fair market value with the intent of making a
gift, the transaction is partly a sale or
exchange and partly a gift. You have a gain if
the amount realized is more than your adjusted
basis in the property. However, you do not have
a loss if the amount realized is less than the
adjusted basis of the property.
Bargain sales to charity. A
bargain sale of property to a charitable
organization is partly a sale or exchange
and partly a charitable contribution. If a
charitable deduction for the contribution is
allowable, you must allocate your adjusted
basis in the property between the part sold
and the part contributed based on the fair
market value of each. The adjusted basis of
the part sold is figured as follows.
Adjusted basis of
entire property × |
Amount realized
(fair market value of part sold)
|
|
|
Fair market value of entire
property |
Based on this allocation rule, you will
have a gain even if the amount realized is
not more than your adjusted basis in the
property. This allocation rule does not
apply if a charitable contribution deduction
is not allowable.
See Publication 526, Charitable
Contributions, for information on figuring
your charitable contribution.
Example.
You sold property with a fair market
value of $10,000 to a charitable
organization for $2,000 and are allowed
a deduction for your contribution. Your
adjusted basis in the property is
$4,000. Your gain on the sale is $1,200,
figured as follows.
Property Used Partly for Business or
Rental
If you sell or exchange property you used partly
for business or rental purposes and partly for
personal purposes, you must figure the gain or
loss on the sale or exchange as though you had
sold two separate pieces of property. You must
allocate the selling price, selling expenses,
and the basis of the property between the
business or rental part and the personal part.
You must subtract depreciation you took or could
have taken from the basis of the business or
rental part.
Gain or loss on the business or rental part of
the property may be a capital gain or loss or an
ordinary gain or loss, as discussed in chapter 3
under Section 1231
Gains and Losses. Any gain on the
personal part of the property is a capital gain.
You cannot deduct a loss on the personal part.
Example.
You sold a condominium for $57,000. You had
bought the property 9 years earlier in
January for $30,000. You used two-thirds of
it as your home and rented out the other
third. You claimed depreciation of $3,272
for the rented part during the time you
owned the property. You made no improvements
to the property. Your selling expenses for
the condominium were $3,600. You figure your
gain or loss as follows.
Property Changed to Business or
Rental Use
You cannot deduct a loss on the sale of property
you acquired for use as your home and used as
your home until the time of sale.
You can deduct a loss on the sale of property
you acquired for use as your home but changed to
business or rental property and used as business
or rental property at the time of sale. However,
if the adjusted basis of the property at the
time of the change was more than its fair market
value, the loss you can deduct is limited.
Figure the loss you can deduct as follows.
-
Use the lesser of the property's
adjusted basis or fair market value at
the time of the change.
-
Add to (1) the cost of any improvements
and other increases to basis since the
change.
-
Subtract from (2) depreciation and any
other decreases to basis since the
change.
-
Subtract the amount you realized on the
sale from the result in (3). If the
amount you realized is more than the
result in (3), treat this result as
zero.
The result in (4) is the loss you can deduct.
Example.
You changed your main home to rental
property 5 years ago. At the time of the
change, the adjusted basis of your home was
$75,000 and the fair market value was
$70,000. This year, you sold the property
for $55,000. You made no improvements to the
property but you have depreciation expense
of $12,620 over the 5 prior years. Although
your loss on the sale is $7,380 [($75,000 -
$12,620) - $55,000], the amount you can
deduct as a loss is limited to $2,380,
figured as follows.
Gain. If you have a
gain on the sale, you generally must
recognize the full amount of the gain. You
figure the gain by subtracting your adjusted
basis from your amount realized, as
described earlier.
You may be able to exclude all or part of
the gain if you owned and lived in the
property as your main home for at least 2
years during the 5-year period ending on the
date of sale. For more information, see
Publication 523.
The
abandonment of property is a disposition of property.
You abandon property when you voluntarily and
permanently give up possession and use of the property
with the intention of ending your ownership but without
passing it on to anyone else.
Loss
from abandonment of business or investment property is
deductible as an ordinary loss, even if the property is
a capital asset. The loss is the property's adjusted
basis when abandoned. This rule also applies to
leasehold improvements the lessor made for the lessee
that were abandoned. However, if the property is later
foreclosed on or repossessed, gain or loss is figured as
discussed later. The abandonment loss is deducted in the
tax year in which the loss is sustained.
You
cannot deduct any loss from abandonment of your home or
other property held for personal use.
Example.
Ann abandoned her home that she bought for $200,000.
At the time she abandoned the house, her mortgage
balance was $185,000. She has a nondeductible loss
of $200,000 (the adjusted basis). If the bank later
forecloses on the loan or repossesses the house, she
will have to figure her gain or loss as discussed
later under Foreclosures
and Repossessions.
Cancellation of debt. If the
abandoned property secures a debt for which you are
personally liable and the debt is canceled, you will
realize ordinary income equal to the canceled debt.
This income is separate from any loss realized from
abandonment of the property. Individuals, report
income from cancellation of a debt related to a
business or rental activity as business or rental
income. Report income from cancellation of a
nonbusiness debt as other income on Form 1040, line
21. Partnerships, corporations, and other entities,
report this income on the comparable line on your
tax return.
However, income from cancellation of debt is not
taxed if any of the following conditions apply.
-
The cancellation is intended as a gift.
-
The debt is qualified farm debt (see chapter
3 of Publication 225, Farmer's Tax Guide).
-
The debt is qualified real property business
debt (see chapter 5 of Publication 334, Tax
Guide for Small Business).
-
You are insolvent or bankrupt (see
Publication 908).
-
The debt is qualified principal residence
indebtedness.
File Form 982, Reduction of Tax Attributes Due to
Discharge of Indebtedness (and Section 1082 Basis
Adjustment), to report the income exclusion.
Forms 1099-A and 1099-C. If
your abandoned property secures a loan and the
lender knows the property has been abandoned, the
lender should send you Form 1099-A showing
information you need to figure your loss from the
abandonment. However, if your debt is canceled and
the lender must file Form 1099-C, the lender may
include the information about the abandonment on
that form instead of on Form 1099-A. The lender must
file Form 1099-C and send you a copy if the amount
of debt canceled is $600 or more and the lender is a
financial institution, credit union, federal
government agency, or any organization that has a
significant trade or business of lending money. For
abandonments of property and debt cancellations
occurring in 2007, these forms should be sent to you
by January 31, 2008.
Foreclosures and Repossessions
If
you do not make payments you owe on a loan secured by
property, the lender may foreclose on the loan or
repossess the property. The foreclosure or repossession
is treated as a sale or exchange from which you may
realize gain or loss. This is true even if you
voluntarily return the property to the lender. You also
may realize ordinary income from cancellation of debt if
the loan balance is more than the fair market value of
the property.
Buyer's (borrower's) gain or loss.
You figure and report gain or loss from a
foreclosure or repossession in the same way as gain
or loss from a sale or exchange. The gain or loss is
the difference between your adjusted basis in the
transferred property and the amount realized. See
Gain or Loss From Sales
and Exchanges, earlier.
You can use Table 1-2 to figure your gain or loss from a
foreclosure or repossession.
Amount realized on a
nonrecourse debt. If you are not
personally liable for repaying the debt (nonrecourse
debt) secured by the transferred property, the
amount you realize includes the full debt canceled
by the transfer. The full canceled debt is included
even if the fair market value of the property is
less than the canceled debt.
Example 1.
Chris bought a new car for $15,000. He paid
$2,000 down and borrowed the remaining $13,000
from the dealer's credit company. Chris is not
personally liable for the loan (nonrecourse
debt), but pledges the new car as security. The
credit company repossessed the car because he
stopped making loan payments. The balance due
after taking into account the payments Chris
made was $10,000. The fair market value of the
car when repossessed was $9,000. The amount
Chris realized on the repossession is $10,000.
That is the debt canceled by the repossession,
even though the car's fair market value is less
than $10,000. Chris figures his gain or loss on
the repossession by comparing the amount
realized ($10,000) with his adjusted basis
($15,000). He has a $5,000 nondeductible loss.
Example 2.
Abena paid $200,000 for her home. She paid
$15,000 down and borrowed the remaining $185,000
from a bank. Abena is not personally liable for
the loan (nonrecourse debt), but pledges the
house as security. The bank foreclosed on the
loan because Abena stopped making payments. When
the bank foreclosed on the loan, the balance due
was $180,000, the fair market value of the house
was $170,000, and Abena's adjusted basis was
$175,000 due to a casualty loss she had
deducted. The amount Abena realized on the
foreclosure is $180,000, the debt canceled by
the foreclosure. She figures her gain or loss by
comparing the amount realized ($180,000) with
her adjusted basis ($175,000). She has a $5,000
realized gain.
Amount realized on a recourse
debt. If you are personally liable for
the debt (recourse debt), the amount realized on the
foreclosure or repossession does not include the
canceled debt that is your income from cancellation
of debt. However, if the fair market value of the
transferred property is less than the canceled debt,
the amount realized includes the canceled debt up to
the fair market value of the property. You are
treated as receiving ordinary income from the
canceled debt for the part of the debt that is more
than the fair market value. See
Cancellation of debt,
later.
Example 1.
Assume the same facts as in the previous Example
1, except Chris is personally liable for the car
loan (recourse debt). In this case, the amount
he realizes is $9,000. This is the canceled debt
($10,000) up to the car's fair market value
($9,000). Chris figures his gain or loss on the
repossession by comparing the amount realized
($9,000) with his adjusted basis ($15,000). He
has a $6,000 nondeductible loss. He also is
treated as receiving ordinary income from
cancellation of debt. That income is $1,000
($10,000 - $9,000). This is the part of the
canceled debt not included in the amount
realized.
Example 2.
Assume the same facts as in the previous Example
2, except Abena is personally liable for the
loan (recourse debt). In this case, the amount
she realizes is $170,000. This is the canceled
debt ($180,000) up to the fair market value of
the house ($170,000). Abena figures her gain or
loss on the foreclosure by comparing the amount
realized ($170,000) with her adjusted basis
($175,000). She has a $5,000 nondeductible loss.
She also is treated as receiving ordinary income
from cancellation of debt. (The debt is not
exempt from tax as discussed under
Cancellation of debt,
below.) That income is $10,000
($180,000 - $170,000). This is the part of the
canceled debt not included in the amount
realized.
Seller's (lender's) gain or loss on
repossession. If you finance a buyer's
purchase of property and later acquire an interest
in it through foreclosure or repossession, you may
have a gain or loss on the acquisition. For more
information, see
Repossession in Publication 537.
Table 1-2. Worksheet for Foreclosures and
Repossessions
Part 1.
Figure your income from cancellation
of debt. (Note:
If you
are
not personally liable for the debt,
you do not have income
from cancellation of debt. Skip Part
1 and go to Part 2.) |
|
|
1.
Enter the amount of debt canceled by
the transfer of property
|
|
|
2.
Enter the fair market value of the
transferred property |
|
3.Income from
cancellation of debt.*
Subtract line 2 from line 1. If
less than zero, enter zero
|
|
|
Part 2.
Figure your gain or loss from
foreclosure or repossession.
|
|
4.
Enter the
smaller of line 1 or line
2. Also include any proceeds you
received from the foreclosure sale.
(If you are not personally liable
for the debt, enter the amount of
debt canceled by the transfer of
property.) |
|
|
5.
Enter the adjusted basis of the
transferred property |
|
6. Gain or
loss from foreclosure or
repossession. Subtract
line 5
from line 4 |
|
|
* The income may not be
taxable. See
Cancellation of debt. |
Cancellation of debt If
property that is repossessed or foreclosed on
secures a debt for which you are personally liable
(recourse debt), you generally must report as
ordinary income the amount by which the canceled
debt is more than the fair market value of the
property. This income is separate from any gain or
loss realized from the foreclosure or repossession.
Report the income from cancellation of a debt
related to a business or rental activity as business
or rental income. Individuals, report the income
from cancellation of a nonbusiness debt as other
income on Form 1040, line 21. Partnerships,
corporations, and other entities, report the income
on the comparable line on your tax return.
You
can use Table 1-2 to figure your income from
cancellation of debt.
However, income from cancellation of debt is not
taxed if any of the following conditions apply.
-
The cancellation is intended as a gift.
-
The debt is qualified farm debt (see chapter
3 of Publication 225).
-
The debt is qualified real property business
debt (see chapter 5 of Publication 334).
-
You are insolvent or bankrupt (see
Publication 908).
-
The debt is qualified principal residence
indebtedness.
File Form 982 to report the income exclusion.
Forms 1099-A and 1099-C A
lender who acquires an interest in your property in
a foreclosure or repossession should send you Form
1099-A showing the information you need to figure
your gain or loss. However, if the lender also
cancels part of your debt and must file Form 1099-C,
the lender may include the information about the
foreclosure or repossession on that form instead of
on Form 1099-A. The lender must file Form 1099-C and
send you a copy if the amount of debt canceled is
$600 or more and the lender is a financial
institution, credit union, federal government
agency, or any organization that has a significant
trade or business of lending money. For foreclosures
or repossessions occurring in 2007, these forms
should be sent to you by January 31, 2008.
An
involuntary conversion occurs when your property is
destroyed, stolen, condemned, or disposed of under the
threat of condemnation and you receive other property or
money in payment, such as insurance or a condemnation
award. Involuntary conversions are also called
involuntary exchanges.
Gain
or loss from an involuntary conversion of your property
is usually recognized for tax purposes unless the
property is your main home. You report the gain or
deduct the loss on your tax return for the year you
realize it. You cannot deduct a loss from an involuntary
conversion of property you held for personal use unless
the loss resulted from a casualty or theft.
However, depending on the type of property you receive,
you may not have to report a gain on an involuntary
conversion. Generally, you do not report the gain if you
receive property that is similar or related in service
or use to the converted property. Your basis for the new
property is the same as your basis for the converted
property. This means that the gain is deferred until a
taxable sale or exchange occurs.
If
you receive money or property that is not similar or
related in service or use to the involuntarily converted
property and you buy qualifying replacement property
within a certain period of time, you can elect to
postpone reporting the gain.
This
publication explains the treatment of a gain or loss
from a condemnation or disposition under the threat of
condemnation. If you have a gain or loss from the
destruction or theft of property, see Publication 547.
A condemnation is the process by which private
property is legally taken for public use without the
owner's consent. The property may be taken by the
federal government, a state government, a political
subdivision, or a private organization that has the
power to legally take it. The owner receives a
condemnation award (money or property) in exchange
for the property taken. A condemnation is like a
forced sale, the owner being the seller and the
condemning authority being the buyer.
Example.
A local government authorized to acquire land
for public parks informed you that it wished to
acquire your property. After the local
government took action to condemn your property,
you went to court to keep it. But, the court
decided in favor of the local government, which
took your property and paid you an amount fixed
by the court. This is a condemnation of private
property for public use.
Threat of condemnation. A
threat of condemnation exists if a
representative of a government body or a public
official authorized to acquire property for
public use informs you that the government body
or official has decided to acquire your
property. You must have reasonable grounds to
believe that, if you do not sell voluntarily,
your property will be condemned.
The sale of your property to someone other
than the condemning authority will also qualify
as an involuntary conversion, provided you have
reasonable grounds to believe that your property
will be condemned. If the buyer of this property
knows at the time of purchase that it will be
condemned and sells it to the condemning
authority, this sale also qualifies as an
involuntary conversion.
Reports of condemnation.
A threat of condemnation exists if you learn
of a decision to acquire your property for
public use through a report in a newspaper or
other news medium, and this report is confirmed
by a representative of the government body or
public official involved. You must have
reasonable grounds to believe that they will
take necessary steps to condemn your property if
you do not sell voluntarily. If you relied on
oral statements made by a government
representative or public official, the Internal
Revenue Service (IRS) may ask you to get written
confirmation of the statements.
Example.
Your property lies along public utility
lines. The utility company has the authority
to condemn your property. The company
informs you that it intends to acquire your
property by negotiation or condemnation. A
threat of condemnation exists when you
receive the notice.
Related property voluntarily
sold. A voluntary sale of your property
may be treated as a forced sale that qualifies
as an involuntary conversion if the property had
a substantial economic relationship to property
of yours that was condemned. A substantial
economic relationship exists if together the
properties were one economic unit. You also must
show that the condemned property could not
reasonably or adequately be replaced. You can
elect to postpone reporting the gain by buying
replacement property. See
Postponement of Gain, later.
Gain or Loss From Condemnations
If your property was condemned or disposed of
under the threat of condemnation, figure your
gain or loss by comparing the adjusted basis of
your condemned property with your net
condemnation award.
If your net condemnation award is more than the
adjusted basis of the condemned property, you
have a gain. You can postpone reporting gain
from a condemnation if you buy replacement
property. If only part of your property is
condemned, you can treat the cost of restoring
the remaining part to its former usefulness as
the cost of replacement property. See
Postponement of Gain,
later.
If your net condemnation award is less than your
adjusted basis, you have a loss. If your loss is
from property you held for personal use, you
cannot deduct it. You must report any deductible
loss in the tax year it happened.
You can use Part 2 of Table 1-3 to figure your
gain or loss from a condemnation award.
Main home condemned.
If you have a gain because your main home
is condemned, you generally can exclude the
gain from your income as if you had sold or
exchanged your home. You may be able to
exclude up to $250,000 of the gain (up to
$500,000 if married filing jointly). For
information on this exclusion, see
Publication 523. If your gain is more than
you can exclude but you buy replacement
property, you may be able to postpone
reporting the rest of the gain. See
Postponement of
Gain, later.
Table 1-3. Worksheet for
Condemnations
Part 1.
Gain from severance damages.
(If you did not receive
severance damages, skip Part 1
and go to Part 2.) |
|
|
1. |
Enter severance damages received
|
|
|
2. |
Enter your expenses in getting
severance damages |
|
|
3. |
Subtract line 2 from line 1. If
less than zero, enter -0-
|
|
|
4. |
Enter any special assessment on
remaining property taken out of
your award |
|
|
5. |
Net severance damages. Subtract
line 4 from line 3. If less than
zero, enter -0- |
|
|
6. |
Enter the adjusted basis of the
remaining property |
|
|
7. |
Gain from severance damages.
Subtract line 6 from line 5. If
less than zero, enter -0-
|
|
|
8. |
Refigured adjusted basis of the
remaining property. Subtract
line 5 from line 6. If less than
zero, enter -0- |
|
|
Part 2. Gain or loss from
condemnation award. |
|
|
9. |
Enter the condemnation award
received |
|
|
10. |
Enter your expenses in getting
the condemnation award
|
|
|
11. |
If you completed Part 1, and
line 4 is more than line 3,
subtract line 3 from line 4.
Otherwise, enter -0-
|
|
|
12. |
Add lines 10 and 11 |
|
|
13. |
Net
condemnation award.
Subtract line 12 from line 9
|
|
|
14. |
Enter the adjusted basis of the
condemned property |
|
|
15. |
Gain from
condemnation award.
If line 14 is more than line 13,
enter -0-. Otherwise, subtract
line 14 from
line 13 and skip line 16
|
|
|
16. |
Loss from
condemnation award.
Subtract line 13 from line 14
|
|
|
|
(Note:
You cannot deduct the amount
on line 16 if the condemned
property was held for personal
use.) |
|
Part 3.
Postponed gain from
condemnation.
(Complete only if line 7 or line
15 is more than zero and you
bought qualifying replacement
property or made expenditures to
restore the usefulness of your
remaining property.)
|
|
|
17. |
If you completed Part 1, and
line 7 is more than zero, enter
the amount from line 5.
Otherwise, enter -0-
|
|
|
18. |
If line 15 is more than zero,
enter the amount from line 13.
Otherwise, enter -0-
|
|
|
19. |
Add lines 17 and 18*
|
|
|
20. |
Enter the
total cost of replacement
property and any expenses to
restore the usefulness of your
remaining property |
|
|
21. |
Subtract line 20 from line 19.
If less than zero, enter -0-
|
|
|
22. |
If you completed Part 1, add
lines 7 and 15. Otherwise, enter
the amount from line 15
|
|
|
23. |
Recognized
gain. Enter the
smaller
of line 21 or line
22. |
|
|
24. |
Postponed
gain. Subtract line
23 from line 22. If less than
zero, enter -0- |
|
*If the condemned
property was your main home,
subtract from this total the
gain you excluded from your
income and enter the result.
|
Condemnation award. A
condemnation award is the money you are paid
or the value of other property you receive
for your condemned property. The award is
also the amount you are paid for the sale of
your property under threat of condemnation.
Payment of your debts.
Amounts taken out of the award to pay your
debts are considered paid to you. Amounts
the government pays directly to the holder
of a mortgage or lien against your property
are part of your award, even if the debt
attaches to the property and is not your
personal liability.
Example.
The state condemned your property for
public use. The award was set at
$200,000. The state paid you only
$148,000 because it paid $50,000 to your
mortgage holder and $2,000 accrued real
estate taxes. You are considered to have
received the entire $200,000 as a
condemnation award.
Interest on award.
If the condemning authority pays you
interest for its delay in paying your award,
it is not part of the condemnation award.
You must report the interest separately as
ordinary income.
Payments to relocate.
Payments you receive to relocate and
replace housing because you have been
displaced from your home, business, or farm
as a result of federal or federally assisted
programs are not part of the condemnation
award. Do not include them in your income.
Replacement housing payments used to buy new
property are included in the property's
basis as part of your cost.
Net condemnation award.
A net condemnation award is the total
award you received, or are considered to
have received, for the condemned property
minus your expenses of obtaining the award.
If only a part of your property was
condemned, you also must reduce the award by
any special assessment levied against the
part of the property you retain. This is
discussed later under
Special assessment taken out of award.
Severance damages Severance
damages are not part of the award paid for
the property condemned. They are paid to you
if part of your property is condemned and
the value of the part you keep is decreased
because of the condemnation.
For example, you may receive severance
damages if your property is subject to
flooding because you sell flowage easement
rights (the condemned property) under threat
of condemnation. Severance damages also may
be given to you if, because part of your
property is condemned for a highway, you
must replace fences, dig new wells or
ditches, or plant trees to restore your
remaining property to the same usefulness it
had before the condemnation.
The contracting parties should agree on
the specific amount of severance damages in
writing. If this is not done, all proceeds
from the condemning authority are considered
awarded for your condemned property.
You cannot make a completely new
allocation of the total award after the
transaction is completed. However, you can
show how much of the award both parties
intended for severance damages. The
severance damages part of the award is
determined from all the facts and
circumstances.
Example.
You sold part of your property to the
state under threat of condemnation. The
contract you and the condemning
authority signed showed only the total
purchase price. It did not specify a
fixed sum for severance damages.
However, at settlement, the condemning
authority gave you closing papers
showing clearly the part of the purchase
price that was for severance damages.
You may treat this part as severance
damages.
Treatment of severance
damages. Your net severance
damages are treated as the amount realized
from an involuntary conversion of the
remaining part of your property. Use them to
reduce the basis of the remaining property.
If the amount of severance damages is based
on damage to a specific part of the property
you kept, reduce the basis of only that part
by the net severance damages.
If your net severance damages are more
than the basis of your retained property,
you have a gain. You may be able to postpone
reporting the gain. See
Postponement of
Gain, later.
You can use Part 1 of Table 1-3 to figure
any gain from severance damages and to
refigure the adjusted basis of the remaining
part of your property.
Net severance damages.
To figure your net severance damages, you
first must reduce your severance damages by
your expenses in obtaining the damages. You
then reduce them by any special assessment
(described later) levied against the
remaining part of the property and retained
out of the award by the condemning
authority. The balance is your net severance
damages.
Expenses of obtaining a
condemnation award and severance damages.
Subtract the expenses of obtaining a
condemnation award, such as legal,
engineering, and appraisal fees, from the
total award. Also, subtract the expenses of
obtaining severance damages, that may
include similar expenses, from the severance
damages paid to you. If you cannot determine
which part of your expenses is for each part
of the condemnation proceeds, you must make
a proportionate allocation.
Example.
You receive a condemnation award and
severance damages. One-fourth of the
total was designated as severance
damages in your agreement with the
condemning authority. You had legal
expenses for the entire condemnation
proceeding. You cannot determine how
much of your legal expenses is for each
part of the condemnation proceeds. You
must allocate one-fourth of your legal
expenses to the severance damages and
the other three-fourths to the
condemnation award.
Special assessment retained
out of award. When only part of your
property is condemned, a special assessment
levied against the remaining property may be
retained by the governing body out of your
condemnation award. An assessment may be
levied if the remaining part of your
property benefited by the improvement
resulting from the condemnation. Examples of
improvements that may cause a special
assessment are widening a street and
installing a sewer.
To figure your net condemnation award, you
must reduce the amount of the award by the
assessment retained out of the award.
Example.
To widen the street in front of your
home, the city condemned a 25-foot deep
strip of your land. You were awarded
$5,000 for this and spent $300 to get
the award. Before paying the award, the
city levied a special assessment of $700
for the street improvement against your
remaining property. The city then paid
you only $4,300. Your net award is
$4,000 ($5,000 total award minus $300
expenses in obtaining the award and $700
for the special assessment retained).
If the $700 special assessment was not
retained out of the award and you were
paid $5,000, your net award would be
$4,700 ($5,000 - $300). The net award
would not change, even if you later paid
the assessment from the amount you
received.
Severance damages
received. If severance damages
are included in the condemnation proceeds,
the special assessment retained out of the
severance damages is first used to reduce
the severance damages. Any balance of the
special assessment is used to reduce the
condemnation award.
Example.
You were awarded $4,000 for the
condemnation of your property and $1,000
for severance damages. You spent $300 to
obtain the severance damages. A special
assessment of $800 was retained out of
the award. The $1,000 severance damages
are reduced to zero by first subtracting
the $300 expenses and then $700 of the
special assessment. Your $4,000
condemnation award is reduced by the
$100 balance of the special assessment,
leaving a $3,900 net condemnation award.
Part business or rental If
you used part of your condemned property as
your home and part as business or rental
property, treat each part as a separate
property. Figure your gain or loss
separately because gain or loss on each part
may be treated differently.
Some examples of this type of property are
a building in which you live and operate a
grocery, and a building in which you live on
the first floor and rent out the second
floor.
Example.
You sold your building for $24,000 under
threat of condemnation to a public
utility company that had the authority
to condemn. You rented half the building
and lived in the other half. You paid
$25,000 for the building and spent an
additional $1,000 for a new roof. You
claimed allowable depreciation of $4,600
on the rental half. You spent $200 in
legal expenses to obtain the
condemnation award. Figure your gain or
loss as follows.
Do not report the gain on condemned property if
you receive only property that is similar or
related in service or use to the condemned
property. Your basis for the new property is the
same as your basis for the old.
Money or unlike property
received. You ordinarily must report
the gain if you receive money or unlike
property. You can elect to postpone
reporting the gain if you buy property that
is similar or related in service or use to
the condemned property within the
replacement period, discussed later. You
also can elect to postpone reporting the
gain if you buy a controlling interest (at
least 80%) in a corporation owning property
that is similar or related in service or use
to the condemned property. See
Controlling
interest in a corporation,
later.
To postpone reporting all the gain, you
must buy replacement property costing at
least as much as the amount realized for the
condemned property. If the cost of the
replacement property is less than the amount
realized, you must report the gain up to the
unspent part of the amount realized.
The basis of the replacement property is
its cost, reduced by the postponed gain.
Also, if your replacement property is stock
in a corporation that owns property similar
or related in service or use, the
corporation generally will reduce its basis
in its assets by the amount by which you
reduce your basis in the stock. See
Controlling
interest in a corporation,
later.
You can use Part 3 of Table 1-3 to figure the
gain you must report and your postponed gain.
Postponing gain on
severance damages. If you received
severance damages for part of your property
because another part was condemned and you
buy replacement property, you can elect to
postpone reporting gain. See
Treatment of
severance damages, earlier. You
can postpone reporting all your gain if the
replacement property costs at least as much
as your net severance damages plus your net
condemnation award (if resulting in gain).
You also can make this election if you
spend the severance damages, together with
other money you received for the condemned
property (if resulting in gain), to acquire
nearby property that will allow you to
continue your business. If suitable nearby
property is not available and you are forced
to sell the remaining property and relocate
in order to continue your business, see
Postponing gain
on the sale of related property,
next.
If you restore the remaining property to
its former usefulness, you can treat the
cost of restoring it as the cost of
replacement property.
Postponing gain on the sale
of related property. If you sell
property that is related to the condemned
property and then buy replacement property,
you can elect to postpone reporting gain on
the sale. You must meet the requirements
explained earlier under
Related property
voluntarily sold. You can
postpone reporting all your gain if the
replacement property costs at least as much
as the amount realized from the sale plus
your net condemnation award (if resulting in
gain) plus your net severance damages, if
any (if resulting in gain).
Buying replacement property
from a related person. Certain
taxpayers cannot postpone reporting gain
from a condemnation if they buy the
replacement property from a related person.
For information on related persons, see
Nondeductible Loss under
Sales and
Exchanges Between Related Persons
in chapter 2.
This rule applies to the following
taxpayers.
-
C corporations.
-
Partnerships in which more than 50%
of the capital or profits interest
is owned by
C corporations.
-
All others (including individuals,
partnerships (other than those in
(2)), and S corporations) if the
total realized gain for the tax year
on all involuntarily converted
properties on which there are
realized gains is more than
$100,000.
For taxpayers described in (3) above,
gains cannot be offset with any losses when
determining whether the total gain is more
than $100,000. If the property is owned by a
partnership, the $100,000 limit applies to
the partnership and each partner. If the
property is owned by an S corporation, the
$100,000 limit applies to the S corporation
and each shareholder.
Exception.
This rule does not apply if the related
person acquired the property from an
unrelated person within the replacement
period.
Advance payment. If
you pay a contractor in advance to build
your replacement property, you have not
bought replacement property unless it is
finished before the end of the replacement
period (discussed later).
Replacement property To
postpone reporting gain, you must buy
replacement property for the specific
purpose of replacing your condemned
property. You do not have to use the actual
funds from the condemnation award to acquire
the replacement property. Property you
acquire by gift or inheritance does not
qualify as replacement property.
Similar or related in
service or use. Your replacement
property must be similar or related in
service or use to the property it replaces.
If the condemned property is real property
you held for use in your trade or business
or for investment (other than property held
mainly for sale), but your replacement
property is not similar or related in
service or use, it will be treated as such
if it is like-kind property to be held for
use in a trade or business or for
investment. For a discussion of like-kind
property, see
Like-Kind Property under
Like-Kind
Exchanges, later.
Owner-user.
If you are an owner-user, similar or
related in service or use means that
replacement property must function in the
same way as the property it replaces.
Example.
Your home was condemned and you invested
the proceeds from the condemnation in a
grocery store. Your replacement property
is not similar or related in service or
use to the condemned property. To be
similar or related in service or use,
your replacement property must also be
used by you as your home.
Owner-investor.
If you are an owner-investor, similar or
related in service or use means that any
replacement property must have the same
relationship of services or uses to you as
the property it replaces. You decide this by
determining all the following information.
-
Whether the properties are of
similar service to you.
-
The nature of the business risks
connected with the properties.
-
What the properties demand of you in
the way of management, service, and
relations to your tenants.
Example.
You owned land and a building you rented
to a manufacturing company. The building
was condemned. During the replacement
period, you had a new building built on
other land you already owned. You rented
out the new building for use as a
wholesale grocery warehouse. The
replacement property is also rental
property, so the two properties are
considered similar or related in service
or use if there is a similarity in all
the following areas.
-
Your management activities.
-
The amount and kind of services
you provide to your tenants.
-
The nature of your business
risks connected with the
properties.
Leasehold replaced with
fee simple property. Fee simple
property you will use in your trade or
business or for investment can qualify as
replacement property that is similar or
related in service or use to a condemned
leasehold if you use it in the same business
and for the identical purpose as the
condemned leasehold.
A fee simple property interest generally
is a property interest that entitles the
owner to the entire property with
unconditional power to dispose of it during
his or her lifetime. A leasehold is property
held under a lease, usually for a term of
years.
Outdoor advertising
display replaced with real property.
You can elect to treat an outdoor
advertising display as real property. If you
make this election and you replace the
display with real property in which you hold
a different kind of interest, your
replacement property can qualify as
like-kind property. For example, real
property bought to replace a destroyed
billboard and leased property on which the
billboard was located qualifies as property
of a like kind.
You can make this election only if you did
not claim a section 179 deduction for the
display. You cannot cancel this election
unless you get the consent of the IRS.
An outdoor advertising display is a sign
or device rigidly assembled and permanently
attached to the ground, a building, or any
other permanent structure used to display a
commercial or other advertisement to the
public.
Substituting
replacement property. Once you
designate certain property as replacement
property on your tax return, you cannot
substitute other qualified property. But, if
your previously designated replacement
property does not qualify, you can
substitute qualified property if you acquire
it within the replacement period.
Controlling interest in a
corporation You can replace property by
acquiring a controlling interest in a
corporation that owns property similar or
related in service or use to your condemned
property. You have controlling interest if
you own stock having at least 80% of the
combined voting power of all classes of
stock entitled to vote and at least 80% of
the total number of shares of all other
classes of stock of the corporation.
Basis adjustment to
corporation's property. The basis
of property held by the corporation at the
time you acquired control must be reduced by
your postponed gain, if any. You are not
required to reduce the adjusted basis of the
corporation's properties below your adjusted
basis in the corporation's stock (determined
after reduction by your postponed gain).
Allocate this reduction to the following
classes of property in the order shown
below.
-
Property that is similar or related
in service or use to the condemned
property.
-
Depreciable property not reduced in
(1).
-
All other property.
If two or more properties fall in the same
class, allocate the reduction to each
property in proportion to the adjusted basis
of all the properties in that class. The
reduced basis of any single property cannot
be less than zero.
Main home replaced.
If your gain from a condemnation of your
main home is more than you can exclude from
your income (see
Main home condemned under
Gain or Loss From
Condemnations, earlier), you can
postpone reporting the rest of the gain by
buying replacement property that is similar
or related in service or use. To postpone
reporting all the gain, the replacement
property must cost at least as much as the
amount realized from the condemnation minus
the excluded gain.
You must reduce the basis of your
replacement property by the postponed gain.
Also, if you postpone reporting any part of
your gain under these rules, you are treated
as having owned and used the replacement
property as your main home for the period
you owned and used the condemned property as
your main home.
Replacement period.
To postpone reporting your gain from a
condemnation, you must buy replacement
property within a certain period of time.
This is the replacement period.
The replacement period for a condemnation
begins on the earlier of the following
dates.
-
The date on which you disposed of
the condemned property.
-
The date on which the threat of
condemnation began.
The replacement period generally ends 2
years after the end of the first tax year in
which any part of the gain on the
condemnation is realized. However, see the
exceptions below.
If real property held for use in a trade
or business or for investment (not including
property held primarily for sale) is
condemned, the replacement period ends 3
years after the end of the first tax year in
which any part of the gain on the
condemnation is realized. However, this
3-year replacement period cannot be used if
you replace the condemned property by
acquiring control of a corporation owning
property that is similar or related in
service or use.
Extended replacement
period for property located in the Hurricane
Katrina disaster area. If
property in the Hurricane Katrina disaster
area is compulsorily or involuntarily
converted after August 24, 2005, the
replacement period ends 5 years after the
end of the first tax year in which any part
of the gain is realized on the involuntary
conversion. This 5-year replacement period
applies only if substantially all of the use
of the replacement property is in the
Hurricane Katrina disaster area. See
Publication 4492, Information for Taxpayers
Affected by Hurricanes Katrina, Rita, and
Wilma.
New York Liberty Zone
property condemned. If property
in the New York Liberty Zone was condemned
as a result of the September 11, 2001,
terrorist attacks, the replacement period
ends 5 years after the end of the first tax
year in which any part of the gain on the
condemnation is realized. This 5-year
replacement period applies only if
substantially all of the use of the
replacement property is in New York City.
See Publication 547.
Weather-related sales
of livestock in an area eligible for federal
assistance. For the sale or
exchange of livestock due to drought, flood,
or other weather-related conditions in an
area eligible for federal assistance, the
replacement period ends 4 years after the
close of the first tax year in which you
realize any part of your gain from the sale
or exchange. The IRS may extend the
replacement period on a regional basis if
the weather-related conditions continue for
longer than 3 years.
For information on extensions of the
replacement period because of persistent
drought, see Notice 2006-82. You can find
Notice 2006-82 on page 529 of Internal
Revenue Bulletin 2006-39 at
www.irs.gov/pub/irs-irbs/irb06-39.pdf.
For a list of counties,
districts, cities, or parishes for which
exceptional, extreme, or severe drought was
reported during the 12-month period ending
August 31, 2007, see Notice 2007-80. You can
find Notice 2007-80 on page 867 of Internal
Revenue Bulletin 2007-43 at
www.irs.gov/pub/irs-irbs/irb07-43.pdf. If
you qualified for a 4-year replacement
period for livestock sold or exchanged on
account of drought and your replacement
period is scheduled to expire at the end of
2007 (or at the end of the tax year that
includes August 27, 2007), the replacement
period will be extended under Notice 2006-82
if the applicable region is on the list.
Determining when gain
is realized. If you are a cash
basis taxpayer, you realize gain when you
receive payments that are more than your
basis in the property. If the condemning
authority makes deposits with the court, you
realize gain when you withdraw (or have the
right to withdraw) amounts that are more
than your basis.
This applies even if the amounts received
are only partial or advance payments and the
full award has not yet been determined. A
replacement will be too late if you wait for
a final determination that does not take
place in the applicable replacement period
after you first realize gain.
For accrual basis taxpayers, gain (if any)
accrues in the earlier year when either of
the following occurs.
-
All events have occurred that fix
the right to the condemnation award
and the amount can be determined
with reasonable accuracy.
-
All or part of the award is actually
or constructively received.
For example, if you have an absolute right
to a part of a condemnation award when it is
deposited with the court, the amount
deposited accrues in the year the deposit is
made even though the full amount of the
award is still contested.
Replacement property
bought before the condemnation.
If you buy your replacement property after
there is a threat of condemnation but before
the actual condemnation and you still hold
the replacement property at the time of the
condemnation, you have bought your
replacement property within the replacement
period. Property you acquire before there is
a threat of condemnation does not qualify as
replacement property acquired within the
replacement period.
Example.
On April 3, 2006, city authorities
notified you that your property would be
condemned. On June 5, 2006, you acquired
property to replace the property to be
condemned. You still had the new
property when the city took possession
of your old property on September 4,
2007. You have made a replacement within
the replacement period.
Extension.
You can request an extension of the
replacement period from the IRS director for
your area. You should apply before the end
of the replacement period. Your request
should explain in detail why you need an
extension. The IRS will consider a request
filed within a reasonable time after the
replacement period if you can show
reasonable cause for the delay. An extension
of the replacement period will be granted if
you can show reasonable cause for not making
the replacement within the regular period.
Ordinarily, requests for extensions are
granted near the end of the replacement
period or the extended replacement period.
Extensions are usually limited to a period
of 1 year or less. The high market value or
scarcity of replacement property is not a
sufficient reason for granting an extension.
If your replacement property is being built
and you clearly show that the replacement or
restoration cannot be made within the
replacement period, you will be granted an
extension of the period.
Send your request to the address where you
filed your return, addressed as follows:
Extension Request for Replacement Period
of Involuntarily Converted Property
Area Director
Attention: Area Technical Services,
Compliance Function
Election to postpone gain.
Report your election to postpone reporting
your gain, along with all necessary details,
on a statement attached to your return for
the tax year in which you realize the gain.
If a partnership or a corporation owns the
condemned property, only the partnership or
corporation can elect to postpone reporting
the gain.
Replacement property
acquired after return filed. If
you buy the replacement property after you
file your return reporting your election to
postpone reporting the gain, attach a
statement to your return for the year in
which you buy the property. The statement
should contain detailed information on the
replacement property.
Amended return.
If you elect to postpone reporting gain,
you must file an amended return for the year
of the gain (individuals file Form 1040X) in
either of the following situations.
-
You do not buy replacement property
within the replacement period. On
your amended return, you must report
the gain and pay any additional tax
due.
-
The replacement property you buy
costs less than the amount realized
for the condemned property (minus
the gain you excluded from income if
the property was your main home). On
your amended return, you must report
the part of the gain you cannot
postpone reporting and pay any
additional tax due.
Time for assessing a
deficiency. Any deficiency for
any tax year in which part of the gain is
realized may be assessed at any time before
the expiration of 3 years from the date you
notify the IRS director for your area that
you have replaced, or intend not to replace,
the condemned property within the
replacement period.
Changing your mind.
You can change your mind about reporting
or postponing the gain at any time before
the end of the replacement period.
Example.
Your property was condemned and you had
a gain of $5,000. You reported the gain
on your return for the year in which you
realized it, and paid the tax due. You
buy replacement property within the
replacement period. You used all but
$1,000 of the amount realized from the
condemnation to buy the replacement
property. You now change your mind and
want to postpone reporting the $4,000 of
gain equal to the amount you spent for
the replacement property. You should
file a claim for refund on Form 1040X.
Explain on Form 1040X that you
previously reported the entire gain from
the condemnation, but you now want to
report only the part of the gain equal
to the condemnation proceeds not spent
for replacement property ($1,000).
Reporting a Condemnation Gain or
Loss
Generally, you report gain or loss from a
condemnation on your return for the year you
realize the gain or loss.
Personal-use property.
Report gain from a condemnation of
property you held for personal use (other
than excluded gain from a condemnation of
your main home or postponed gain) on
Schedule D (Form 1040).
Do not report loss from a condemnation of
personal-use property. But, if you received
a Form 1099-S, Proceeds From Real Estate
Transactions (for example, showing the
proceeds of a sale of real estate under
threat of condemnation), you must show the
transaction on Schedule D (Form 1040) even
though the loss is not deductible. Complete
columns (a) through (e), and enter -0- in
column (f).
Business property.
Report gain (other than postponed gain) or
loss from a condemnation of property you
held for business or profit on Form 4797. If
you had a gain, you may have to report all
or part of it as ordinary income. See
Like-Kind Exchanges and Involuntary
Conversions
in chapter 3.
Certain exchanges of property are not taxable. This
means any gain from the exchange is not recognized, and
any loss cannot be deducted. Your gain or loss will not
be recognized until you sell or otherwise dispose of the
property you receive.
The exchange of property for the same kind of
property is the most common type of nontaxable
exchange. To be a like-kind exchange, the property
traded and the property received must be both of the
following.
-
Qualifying property.
-
Like-kind property.
These two requirements are discussed later.
Additional requirements apply to exchanges in which
the property received is not received immediately
upon the transfer of the property given up. See
Deferred Exchange,
later.
If the like-kind exchange involves the receipt of
money or unlike property or the assumption of your
liabilities, you may have to recognize gain. See
Partially Nontaxable
Exchanges, later.
Multiple-party transactions. The
like-kind exchange rules also apply to property
exchanges that involve three- and four-party
transactions. Any part of these multiple-party
transactions can qualify as a like-kind exchange
if it meets all the requirements described in
this section.
Receipt of title from third
party. If you receive property in a
like-kind exchange and the other party who
transfers the property to you does not give you
the title, but a third party does, you still can
treat this transaction as a like-kind exchange
if it meets all the requirements.
Basis of property received.
If you acquire property in a like-kind
exchange, the basis of that property is
generally the same as the basis of the property
you transferred.
For the basis of property received in an
exchange that is only partially nontaxable, see
Partially Nontaxable
Exchanges, later.
Example.
You exchanged real estate held for
investment with an adjusted basis of $25,000
for other real estate held for investment.
The fair market value of both properties is
$50,000. The basis of your new property is
the same as the basis of the old ($25,000).
Money paid. If, in
addition to giving up like-kind property, you
pay money in a like-kind exchange, you still
have no recognized gain or loss. The basis of
the property received is the basis of the
property given up, increased by the money paid.
Example.
Bill Smith trades an old cab for a new one.
The new cab costs $30,000. He is allowed
$8,000 for the old cab and pays $22,000
cash. He has no recognized gain or loss on
the transaction regardless of the adjusted
basis of his old cab. If Bill sold the old
cab to a third party for $8,000 and bought a
new one, he would have a recognized gain or
loss on the sale of his old cab equal to the
difference between the amount realized and
the adjusted basis of the old cab.
Sale and purchase. If you
sell property and buy similar property in two
mutually dependent transactions, you may have to
treat the sale and purchase as a single
nontaxable exchange.
Example.
You used your car in your business for 2
years. Its adjusted basis is $3,500 and its
trade-in value is $4,500. You are interested
in a new car that costs $20,000. Ordinarily,
you would trade your old car for the new one
and pay the dealer $15,500. Your basis for
depreciation of the new car would then be
$19,000 ($15,500 plus $3,500 adjusted basis
of the old car).
You want your new car to have a larger basis
for depreciation, so you arrange to sell
your old car to the dealer for $4,500. You
then buy the new one for $20,000 from the
same dealer. However, you are treated as
having exchanged your old car for the new
one because the sale and purchase are
reciprocal and mutually dependent. Your
basis for depreciation for the new car is
$19,000, the same as if you traded the old
car.
Reporting the exchange.
Report the exchange of like-kind property,
even though no gain or loss is recognized, on
Form 8824, Like-Kind Exchanges. The instructions
for the form explain how to report the details
of the exchange.
If you have any recognized gain because you
received money or unlike property, report it on
Schedule D (Form 1040) or Form 797, whichever
applies. See chapter 4. You may have to report
the recognized gain as ordinary income from
depreciation recapture. See
Like-Kind Exchanges
and Involuntary Conversions in
chapter 3.
Exchange expenses.
Exchange expenses are generally the closing
costs you pay. They include such items as
brokerage commissions, attorney fees, and deed
preparation fees. Subtract these expenses from
the consideration received to figure the amount
realized on the exchange. Also, add them to the
basis of the like-kind property received. If you
receive cash or unlike property in addition to
the like-kind property and realize a gain on the
exchange, subtract the expenses from the cash or
fair market value of the unlike property. Then,
use the net amount to figure the recognized
gain. See Partially
Nontaxable Exchanges, later.
In a like-kind exchange, both the property you
give up and the property you receive must be
held by you for investment or for productive use
in your trade or business. Machinery, buildings,
land, trucks, and rental houses are examples of
property that may qualify.
The rules for like-kind exchanges do not apply
to exchanges of the following property.
-
Property you use for personal purposes,
such as your home and your family car.
-
Stock in trade or other property held
primarily for sale, such as inventories,
raw materials, and real estate held by
dealers.
-
Stocks, bonds, notes, or other
securities or evidences of indebtedness,
such as accounts receivable.
-
Partnership interests.
-
Certificates of trust or beneficial
interest.
-
Choses in action.
However, you may have a nontaxable exchange
under other rules. See
Other Nontaxable Exchanges,
later.
An exchange of the assets of a business for the
assets of a similar business cannot be treated
as an exchange of one property for another
property. Whether you engaged in a like-kind
exchange depends on an analysis of each asset
involved in the exchange. However, see
Multiple Property
Exchanges, later.
There must be an exchange of like-kind property.
Like-kind properties are properties of the same
nature or character, even if they differ in
grade or quality. The exchange of real estate
for real estate and the exchange of personal
property for similar personal property are
exchanges of like-kind property. For example,
the trade of land improved with an apartment
house for land improved with a store building,
or a panel truck for a pickup truck, is a
like-kind exchange.
An exchange of personal property for real
property does not qualify as a like-kind
exchange. For example, an exchange of a piece of
machinery for a store building does not qualify.
Also, the exchange of livestock of different
sexes does not qualify.
Real property. An
exchange of city property for farm property,
or improved property for unimproved
property, is a like-kind exchange.
The exchange of real estate you own for a
real estate lease that runs 30 years or
longer is a like-kind exchange. However, not
all exchanges of interests in real property
qualify. The exchange of a life estate
expected to last less than 30 years for a
remainder interest is not a like-kind
exchange.
An exchange of a remainder interest in
real estate for a remainder interest in
other real estate is a like-kind exchange if
the nature or character of the two property
interests is the same.
Foreign real property
exchanges. Real property located
in the United States and real property
located outside the United States are not
considered like-kind property under the
like-kind exchange rules. If you exchange
foreign real property for property located
in the United States, your gain or loss on
the exchange is recognized. Foreign real
property is real property not located in a
state or the District of Columbia.
This foreign real property exchange rule
does not apply to the replacement of
condemned real property. Foreign and U.S.
real property can still be considered
like-kind property under the rules for
replacing condemned property to postpone
reporting gain on the condemnation. See
Postponement of
Gain under
Involuntary
Conversions, earlier.
Personal property.
Depreciable tangible personal property can
be either like kind or like class to qualify
for nonrecognition treatment. Like-class
properties are depreciable tangible personal
properties within the same General Asset
Class or Product Class. Property classified
in any General Asset Class may not be
classified within a Product Class.
General Asset Classes.
General Asset Classes describe the types
of property frequently used in many
businesses. They include the following
property.
-
Office furniture, fixtures, and
equipment (asset class 00.11).
-
Information systems, such as
computers and peripheral equipment
(asset class 00.12).
-
Data handling equipment except
computers (asset class 00.13).
-
Airplanes (airframes and engines),
except planes used in commercial or
contract carrying of passengers or
freight, and all helicopters
(airframes and engines) (asset class
00.21).
-
Automobiles and taxis (asset class
00.22).
-
Buses (asset class 00.23).
-
Light general purpose trucks (asset
class 00.241).
-
Heavy general purpose trucks (asset
class 00.242).
-
Railroad cars and locomotives except
those owned by railroad
transportation companies (asset
class 00.25).
-
Tractor units for use over the road
(asset class 00.26).
-
Trailers and trailer-mounted
containers (asset class 00.27).
-
Vessels, barges, tugs, and similar
water-transportation equipment,
except those used in marine
construction (asset class 00.28).
-
Industrial steam and electric
generation or distribution systems
(asset class 00.4).
Product Classes.
Product Classes include property listed in
a 6-digit product class (except any ending
in 9) in sectors 31 through 33 of the North
American Industry Classification System (NAICS)
of the Executive Office of the President,
Office of Management and Budget, United
States, 2007 (NAICS Manual). It can be
accessed at http://www.census.gov/naics.
Copies of the hard cover manual may be
obtained from the National Technical
Information Service (NTIS) at
http://www.ntis.gov or by calling
1-800-553-NTIS (1-800-553-6847) or (703)
605-6000. The cost of the manual is $59
(plus handling) and the order number is
PB2007100002 (which must be typed into the
NTIS website search box). A CD-ROM version
with search and retrieval software is also
available from NTIS. The CD-ROM disc comes
in three versions: 1) single concurrent
network use; 2) up to 5 users; and, 3)
unlimited concurrent users. The cost of the
CD-ROM is respectively $79, $179, and $358
(plus handling) and the order number is
PB2007500023 (which must be typed into the
NTIS website search box).
Example 1.
You transfer a personal computer used in
your business for a printer to be used
in your business. The properties
exchanged are within the same General
Asset Class and are of a like class.
Example 2.
Trena transfers a grader to Ron in
exchange for a scraper. Both are used in
a business. Neither property is within
any of the General Asset Classes. Both
properties, however, are within the same
Product Class and are of a like class.
Intangible personal
property and nondepreciable personal
property. If you exchange
intangible personal property or
nondepreciable personal property for
like-kind property, no gain or loss is
recognized on the exchange. (There are no
like classes for these properties.) Whether
intangible personal property, such as a
patent or copyright, is of a like kind to
other intangible personal property generally
depends on the nature or character of the
rights involved. It also depends on the
nature or character of the underlying
property to which those rights relate.
Example.
The exchange of a copyright on a novel
for a copyright on a different novel can
qualify as a like-kind exchange.
However, the exchange of a copyright on
a novel for a copyright on a song is not
a like-kind exchange.
Goodwill and going
concern. The exchange of the
goodwill or going concern value of a
business for the goodwill or going concern
value of another business is not a like-kind
exchange.
Foreign personal
property exchanges. Personal
property used predominantly in the United
States and personal property used
predominantly outside the United States are
not like-kind property under the like-kind
exchange rules. If you exchange property
used predominantly in the United States for
property used predominantly outside the
United States, your gain or loss on the
exchange is recognized.
Predominant use.
You determine the predominant use of
property you gave up based on where that
property was used during the 2-year period
ending on the date you gave it up. You
determine the predominant use of the
property you acquired based on where that
property was used during the 2-year period
beginning on the date you acquired it.
But if you held either property less than
2 years, determine its predominant use based
on where that property was used only during
the period of time you (or a related person)
held it. This does not apply if the exchange
is part of a transaction (or series of
transactions) structured to avoid having to
treat property as unlike property under this
rule.
However, you must treat property as used
predominantly in the United States if it is
used outside the United States but, under
section 168(g)(4) of the Internal Revenue
Code, is eligible for accelerated
depreciation as though used in the United
States.
A deferred exchange is one in which you transfer
property you use in business or hold for
investment and later you receive like-kind
property you will use in business or hold for
investment. (The property you receive is
replacement property.) The transaction must be
an exchange (that is, property for property)
rather than a transfer of property for money
used to buy replacement property.
If, before you receive the replacement property,
you actually or constructively receive money or
unlike property in full payment for the property
you transfer, the transaction will be treated as
a sale rather than a deferred exchange. In that
case, you must recognize gain or loss on the
transaction, even if you later receive the
replacement property. (It would be treated as if
you bought it.)
You constructively receive money or unlike
property when the money or property is credited
to your account or made available to you. You
also constructively receive money or unlike
property when any limits or restrictions on it
expire or are waived.
Whether you actually or constructively receive
money or unlike property, however, is determined
without regard to certain arrangements you make
to ensure that the other party carries out its
obligation to transfer the replacement property
to you. For example, if you have that obligation
secured by a mortgage or by cash or its
equivalent held in a qualified escrow account or
qualified trust, that arrangement will be
disregarded in determining whether you actually
or constructively receive money or unlike
property. For more information, see section
1.1031(k)-1(g) of the regulations. Also, see
Like-Kind Exchanges
Using Qualified Intermediaries,
later.
Identification requirement.
You must identify the property to be
received within 45 days after the date you
transfer the property given up in the
exchange. This period of time is called the
identification period. Any property received
during the identification period is
considered to have been identified.
If you transfer more than one property (as
part of the same transaction) and the
properties are transferred on different
dates, the identification period and the
receipt period begin on the date of the
earliest transfer.
Identifying replacement
property. You must identify the
replacement property in a signed written
document and deliver it to the other person
involved in the exchange. You must clearly
describe the replacement property in the
written document. For example, use the legal
description or street address for real
property and the make, model, and year for a
car. In the same manner, you can cancel an
identification of replacement property at
any time before the end of the
identification period.
Identifying alternative
and multiple properties. You can
identify more than one replacement property.
Regardless of the number of properties you
give up, the maximum number of replacement
properties you can identify is the larger of
the following.
-
Three.
-
Any number of properties whose total
fair market value (FMV) at the end
of the identification period is not
more than double the total fair
market value, on the date of
transfer, of all properties you give
up.
If, as of the end of the identification
period, you have identified more properties
than permitted under this rule, the only
property that will be considered identified
is:
-
Any replacement property you
received before the end of the
identification period, and
-
Any replacement property identified
before the end of the identification
period and received before the end
of the receipt period, but only if
the fair market value of the
property is at least 95% of the
total fair market value of all
identified replacement properties.
Fair market value is determined on
the earlier of the date you received
the property or the last day of the
receipt period.
Disregard incidental
property. Do not treat property
incidental to a larger item of property as
separate from the larger item when you
identify replacement property. Property is
incidental if it meets both the following
tests.
-
It is typically transferred with the
larger item.
-
The total fair market value of all
the incidental property is not more
than 15% of the total fair market
value of the larger item of
property.
Replacement property to
be produced. Gain or loss from a
deferred exchange can qualify for
nonrecognition even if the replacement
property is not in existence or is being
produced at the time you identify it as
replacement property. If you need to know
the fair market value of the replacement
property to identify it, estimate its fair
market value as of the date you expect to
receive it.
Receipt requirement.
The property must be received by the
earlier of the following dates.
-
The 180th day after the date on
which you transfer the property
given up in the exchange.
-
The due date, including extensions,
for your tax return for the tax year
in which the transfer of the
property given up occurs.
You must receive substantially the same
property that met the identification
requirement, discussed earlier.
Replacement property
produced after identification. In
some cases, the replacement property may
have been produced after you identified it
(as described earlier in
Replacement
property to be produced.) In
that case, to determine whether the property
you received was substantially the same
property that met the identification
requirement, do not take into account any
variations due to usual production changes.
Substantial changes in the property to be
produced, however, will disqualify it.
If your replacement property is personal
property that had to be produced, it must be
completed by the date you receive it to
qualify as substantially the same property
you identified.
If your replacement property is real
property that had to be produced and it is
not completed by the date you receive it, it
still may qualify as substantially the same
property you identified. It will qualify
only if, had it been completed on time, it
would have been considered to be
substantially the same property you
identified. It is considered to be
substantially the same only to the extent it
is considered real property under local law.
However, any additional production on the
replacement property after you receive it
does not qualify as like-kind property. (To
this extent, the transaction is treated as a
taxable exchange of property for services.)
Like-Kind Exchanges Using Qualified
Intermediaries
If you transfer property through a qualified
intermediary, the transfer of the property given
up and receipt of like-kind property is treated
as an exchange. This rule applies even if you
receive money or other property directly from a
party to the transaction other than the
qualified intermediary.
A qualified intermediary is a person who enters
into a written exchange agreement with you to
acquire and transfer the property you give up
and to acquire the replacement property and
transfer it to you. This agreement must
expressly limit your rights to receive, pledge,
borrow, or otherwise obtain the benefits of
money or other property held by the qualified
intermediary.
Multiple-party transactions
involving related persons. A taxpayer
who transfers property given up to a
qualified intermediary in exchange for
replacement property formerly owned by a
related person is not entitled to
non-recognition treatment if the related
person receives cash or unlike property for
the replacement property. (See
Like-Kind
Exchanges Between Related Persons,
later.)
A qualified intermediary cannot be either of the
following.
-
Your agent at the time of the
transaction. This includes a person who
has been your employee, attorney,
accountant, investment banker or broker,
or real estate agent or broker within
the 2-year period before the transfer of
property you give up.
-
A person who is related to you or your
agent under the rules discussed in
chapter 2 under
Nondeductible Loss,
substituting “10%”
for “50%.”
An intermediary is treated as acquiring and
transferring property if all the following
requirements are met.
-
The intermediary acquires and transfers
legal title to the property.
-
The intermediary enters into an
agreement with a person other than you
for the transfer to that person of the
property you give up and that property
is transferred to that person.
-
The intermediary enters into an
agreement with the owner of the
replacement property for the transfer of
that property and the replacement
property is transferred to you.
An intermediary is treated as entering into an
agreement if the rights of a party to the
agreement are assigned to the intermediary and
all parties to that agreement are notified in
writing of the assignment by the date of the
relevant transfer of property.
Like-Kind Exchanges Using Qualified
Exchange Accommodation Arrangements
(QEAAs)
The like-kind exchange rules generally do not
apply to an exchange in which you acquire
replacement property (new property) before you
transfer relinquished property (property you
give up). However, if you use a qualified
exchange accommodation arrangement (QEAA), the
transfer may qualify as a like-kind exchange.
Under a QEAA, either the replacement property or
the relinquished property is transferred to an
exchange accommodation titleholder (EAT),
discussed later, who is treated as the
beneficial owner of the property. However, for
transfers of qualified indications of ownership
(defined later) on or after July 20, 2004, the
replacement property held in a QEAA may not be
treated as property received in an exchange if
you previously owned it within 180 days of its
transfer to the EAT. If the property is held in
a QEAA, the IRS will accept the qualification of
property as either replacement property or
relinquished property and the treatment of an
EAT as the beneficial owner of the property for
federal income tax purposes.
Requirements for a QEAA.
Property is held in a QEAA only if all the
following requirements are met.
-
You have a written agreement.
-
The time limits for identifying and
transferring the property are met.
-
The qualified indications of
ownership of property are
transferred to an EAT.
Written agreement.
Under a QEAA, you and the EAT must enter
into a written agreement no later than 5
business days after the qualified
indications of ownership (discussed later)
are transferred to the EAT. The agreement
must provide all the following.
-
The EAT is holding the property for
your benefit in order to facilitate
an exchange under the like-kind
exchange rules and Revenue Procedure
2000-37, as modified by Revenue
Procedure 2004-51.
-
You and the EAT agree to report the
acquisition, holding, and
disposition of the property on your
federal income tax returns in a
manner consistent with the
agreement.
-
The EAT will be treated as the
beneficial owner of the property for
all federal income tax purposes.
Property can be treated as being held in a
QEAA even if the accounting, regulatory, or
state, local, or foreign tax treatment of
the arrangement between you and the EAT is
different from the treatment required by the
list above.
Bona fide intent.
When the qualified indications of
ownership of the property are transferred to
the EAT, it must be your bona fide intent
that the property held by the EAT represents
either replacement property or relinquished
property in an exchange intended to qualify
for nonrecognition of gain (in whole or in
part) or loss under the like-kind exchange
rules.
Time limits for identifying
and transferring property. Under a
QEAA, the following time limits for
identifying and transferring the property
must be met.
-
No later than 45 days after the
transfer of qualified indications of
ownership of the replacement
property to the EAT; you must
identify the relinquished property
in a manner consistent with the
principles for deferred exchanges.
See
Identification requirement
earlier under
Deferred
Exchange.
-
One of the following transfers must
take place no later than 180 days
after the transfer of qualified
indications of ownership of the
property to the EAT.
-
The replacement property is
transferred to you (either
directly or indirectly
through a qualified
intermediary, defined
earlier under
Like-Kind Exchanges Using
Qualified Intermediaries).
-
The relinquished property is
transferred to a person
other than you or a
disqualified person. A
disqualified person is
either of the following.
-
Your agent at the
time of the
transaction. This
includes a person
who has been your
employee, attorney,
accountant,
investment banker or
broker, or real
estate agent or
broker within the
2-year period before
the transfer of the
relinquished
property.
-
A person who is
related to you or
your agent under the
rules discussed in
chapter 2 under
Nondeductible
Loss,
substituting “10%”
for “50%.”
-
The combined time period the
relinquished property and
replacement property are held in the
QEAA cannot be longer than 180 days.
Exchange accommodation
titleholder (EAT). The EAT must meet
all the following requirements.
-
Hold qualified indications of
ownership (defined next) at all
times from the date of acquisition
of the property until the property
is transferred (as described in (2),
earlier).
-
Be someone other than you or a
disqualified person (as defined in
2(b), earlier).
-
Be subject to federal income tax. If
the EAT is treated as a partnership
or S corporation, more than 90% of
its interests or stock must be owned
by partners or shareholders who are
subject to federal income tax.
Qualified indications
of ownership. Qualified
indications of ownership are any of the
following.
-
Legal title to the property.
-
Other indications of ownership of
the property that are treated as
beneficial ownership of the property
under principles of commercial law
(for example, a contract for deed).
-
Interests in an entity that is
disregarded as an entity separate
from its owner for federal income
tax purposes (for example, a single
member limited liability company)
and that holds either legal title to
the property or other indications of
ownership.
Other permissible
arrangements. Property will not fail
to be treated as being held in a QEAA as a
result of certain legal or contractual
arrangements, regardless of whether the
arrangements contain terms that typically
would result from arm's-length bargaining
between unrelated parties for those
arrangements. For a list of those
arrangements, see Revenue Procedure 2000-37
in Internal Revenue Bulletin 2000-40.
Partially Nontaxable Exchanges
If, in addition to like-kind property, you
receive money or unlike property in an exchange
on which you realize a gain, you have a
partially nontaxable exchange. You are taxed on
the gain you realize, but only to the extent of
the money and the fair market value of the
unlike property you receive.
A loss is never deductible in a nontaxable
exchange in which you receive unlike property or
cash.
Figuring taxable gain.
To figure the taxable gain, first
determine the fair market value of any
unlike property you receive and add it to
any money you receive. Reduce that total by
any exchange expenses (closing costs) you
paid. The result is the maximum gain that
can be taxed. Next, figure the gain on the
whole exchange as discussed earlier under
Gain or Loss From
Sales and Exchanges. Your
recognized (taxable) gain is the lesser of
these two amounts.
Example.
You exchange real estate held for investment
with an adjusted basis of $8,000 for other
real estate you want to hold for investment.
The fair market value of the real estate you
receive is $10,000. You also receive $1,000
in cash. You paid $500 in exchange expenses.
Although the total gain realized on the
transaction is $2,500, only $500 ($1,000
cash received minus the $500 exchange
expenses) is recognized (included in your
income).
Assumption of liabilities
If the other party to a nontaxable exchange
assumes any of your liabilities, you will be
treated as if you received cash in the
amount of the liability. For more
information on the assumption of
liabilities, see section 357(d) of the
Internal Revenue Code.
Example.
The facts are the same as in the
previous example, except the property
you give up is subject to a $3,000
mortgage for which you were personally
liable. The other party in the trade has
agreed to pay off the mortgage. Figure
the gain realized as follows.
The realized gain is taxed only up to
$3,500, the sum of the cash received
($1,000 - $500 exchange expenses) and
the mortgage ($3,000).
Unlike property given up.
If, in addition to like-kind property, you
give up unlike property, you must recognize
gain or loss on the unlike property you give
up. The gain or loss is equal to the
difference between the fair market value of
the unlike property and the adjusted basis
of the unlike property.
Example.
You exchange stock and real estate you
held for investment for real estate you
also intend to hold for investment. The
stock you transfer has a fair market
value of $1,000 and an adjusted basis of
$4,000. The real estate you exchange has
a fair market value of $19,000 and an
adjusted basis of $15,000. The real
estate you receive has a fair market
value of $20,000. You do not recognize
gain on the exchange of the real estate
because it qualifies as a nontaxable
exchange. However, you must recognize
(report on your return) a $3,000 loss on
the stock because it is unlike property.
Basis of property received.
The total basis for all properties (other
than money) you receive in a partially
nontaxable exchange is the total adjusted
basis of the properties you give up, with
the following adjustments.
-
Add both the following amounts.
-
Any additional costs you
incur.
-
Any gain you recognize on
the exchange.
-
Subtract both the following amounts.
-
Any money you receive.
-
Any loss you recognize on
the exchange.
Allocate this basis first to the unlike
property, other than money, up to its fair
market value on the date of the exchange.
The rest is the basis of the like-kind
property.
Multiple Property Exchanges
Under the like-kind exchange rules, you
generally must make a property-by-property
comparison to figure your recognized gain and
the basis of the property you receive in the
exchange. However, for exchanges of multiple
properties, you do not make a
property-by-property comparison if you do either
of the following.
-
Transfer and receive properties in two
or more exchange groups.
-
Transfer or receive more than one
property within a single exchange group.
In these situations, you figure your recognized
gain and the basis of the property you receive
by comparing the properties within each exchange
group.
Exchange groups. Each
exchange group consists of properties
transferred and received in the exchange
that are of like kind or like class. (See
Like-Kind
Property, earlier.) If property
could be included in more than one exchange
group, you can include it in any one of
those groups. However, the following may not
be included in an exchange group.
-
Money.
-
Stock in trade or other property
held primarily for sale.
-
Stocks, bonds, notes, or other
securities or evidences of debt or
interest.
-
Interests in a partnership.
-
Certificates of trust or beneficial
interests.
-
Choses in action.
Example.
Ben exchanges computer A (asset class
00.12), automobile A (asset class
00.22), and truck A (asset class 00.241)
for computer R (asset class 00.12),
automobile R (asset class 00.22), truck
R (asset class 00.241), and $400. All
properties transferred were used in
Ben's business. Similarly, all
properties received will be used in his
business.
The first exchange group consists of
computers A and R, the second exchange
group consists of automobiles A and R,
and the third exchange group consists of
trucks A and R.
Treatment of
liabilities. Offset all
liabilities you assume as part of the
exchange against all liabilities of which
you are relieved. Offset these liabilities
whether they are recourse or non-recourse
and regardless of whether they are secured
by or otherwise relate to specific property
transferred or received as part of the
exchange.
If you assume more liabilities than you
are relieved of, allocate the difference
among the exchange groups in proportion to
the total fair market value of the
properties you received in the exchange
groups. The difference allocated to each
exchange group may not be more than the
total fair market value of the properties
you received in the exchange group.
The amount of the liabilities allocated to
an exchange group reduces the total fair
market value of the properties received in
that exchange group. This reduction is made
in determining whether the exchange group
has a surplus or a deficiency. (See
Exchange group
surplus and deficiency, later.)
This reduction is also made in determining
whether a residual group is created. (See
Residual group,
later.)
If you are relieved of more liabilities
than you assume, treat the difference as
cash, general deposit accounts (other than
certificates of deposit), and similar items
when making allocations to the residual
group, discussed later.
The treatment of liabilities and any
differences between amounts you assume and
amounts you are relieved of will be the same
even if the like-kind exchange treatment
applies to only part of a larger
transaction. If so, determine the difference
in liabilities based on all liabilities you
assume or are relieved of as part of the
larger transaction.
Example.
The facts are the same as in the
preceding example. In addition, the fair
market value of and liabilities secured
by each property are as follows.
All liabilities assumed by Ben ($1,000)
are offset by all liabilities of which
he is relieved ($500), resulting in a
difference of $500. The difference is
allocated among Ben's exchange groups in
proportion to the fair market value of
the properties received in the exchange
groups as follows.
-
$131 ($500 × $1,600 ÷ $6,100) is
allocated to the first exchange
group (computers A and R). The
fair market value of computer R
is reduced to $1,469 ($1,600 -
$131).
-
$254 ($500 × $3,100 ÷ $6,100) is
allocated to the second exchange
group (automobiles A and R). The
fair market value of automobile
R is reduced to $2,846 ($3,100 -
$254).
-
$115 ($500 × $1,400 ÷ $6,100) is
allocated to the third exchange
group (trucks A and R). The fair
market value of truck R is
reduced to $1,285 ($1,400 -
$115).
In each exchange group, Ben uses the
reduced fair market value of the
properties received to figure the
exchange group's surplus or deficiency
and to determine whether a residual
group has been created.
Residual group. A
residual group is created if the total fair
market value of the properties transferred
in all exchange groups differs from the
total fair market value of the properties
received in all exchange groups after taking
into account the treatment of liabilities
(discussed earlier). The residual group
consists of money or other property that has
a total fair market value equal to that
difference. It consists of either money or
other property transferred in the exchange
or money or other property received in the
exchange, but not both.
Other property includes the following
items.
-
Stock in trade or other property
held primarily for sale.
-
Stocks, bonds, notes, or other
securities or evidences of debt or
interest.
-
Interests in a partnership.
-
Certificates of trust or beneficial
interests.
-
Choses in action.
Other property also includes property
transferred that is not of a like kind or
like class with any property received, and
property received that is not of a like kind
or like class with any property transferred.
For asset acquisitions occurring after March
15, 2001, money and properties allocated to
the residual group are considered to come
from the following assets in the following
order.
-
Cash and general deposit accounts
(including checking and savings
accounts but excluding certificates
of deposit). Also, include here
excess liabilities of which you are
relieved over the amount of
liabilities you assume.
-
Certificates of deposit, U.S.
Government securities, foreign
currency, and actively traded
personal property, including stock
and securities.
-
Accounts receivable, other debt
instruments, and assets that you
mark to market at least annually for
federal income tax purposes.
However, see section
1.338-6(b)(2)(iii) of the
regulations for exceptions that
apply to debt instruments issued by
persons related to a target
corporation, contingent debt
instruments, and debt instruments
convertible into stock or other
property.
-
Property of a kind that would
properly be included in inventory if
on hand at the end of the tax year
or property held by the taxpayer
primarily for sale to customers in
the ordinary course of business.
-
Assets other than those listed in
(1), (2), (3), (4), (6), and (7).
-
All section 197 intangibles except
goodwill and going concern value.
-
Goodwill and going concern value.
Within each category, you can choose which
properties to allocate to the residual
group. If an asset described in any of the
categories above, except (1), is includible
in more than one category, include it in the
lower number category. For example, if an
asset is described in both (3) and (4),
include it in (3).
Example.
Fran exchanges computer A (asset class
00.12) and automobile A (asset class
00.22) for printer B (asset class
00.12), automobile B (asset class
00.22), corporate stock, and $500. Fran
used computer A and automobile A in her
business and will use printer B and
automobile B in her business.
This transaction results in two exchange
groups: (1) computer A and printer B,
and (2) automobile A and automobile B.
The fair market values of the properties
are as follows.
The total fair market value of the
properties transferred in the exchange
groups ($5,000) is $1,250 more than the
total fair market value of the
properties received in the exchange
groups ($3,750), so there is a residual
group in that amount. It consists of the
$500 cash and the $750 worth of
corporate stock.
Exchange group surplus and
deficiency. For each exchange group,
you must determine whether there is an “exchange
group surplus” or “exchange
group deficiency.” An exchange group
surplus is the total fair market value of
the properties received in an exchange group
(minus any excess liabilities you assume
that are allocated to that exchange group)
that is more than the total fair market
value of the properties transferred in that
exchange group. An exchange group deficiency
is the total fair market value of the
properties transferred in an exchange group
that is more than the total fair market
value of the properties received in that
exchange group (minus any excess liabilities
you assume that are allocated to that
exchange group).
Example.
Karen exchanges computer A (asset class
00.12) and automobile A (asset class
00.22), both of which she used in her
business, for printer B (asset class
00.12) and automobile B (asset class
00.22), both of which she will use in
her business. Karen's adjusted basis and
the fair market value of the exchanged
properties are as follows.
The first exchange group consists of
computer A and printer B. It has an
exchange group surplus of $1,050 because
the fair market value of printer B
($2,050) is more than the fair market
value of computer A ($1,000) by that
amount.
The second exchange group consists of
automobile A and automobile B. It has an
exchange group deficiency of $1,050
because the fair market value of
automobile A ($4,000) is more than the
fair market value of automobile B
($2,950) by that amount.
Recognized gain. Gain or loss realized
for each exchange group and the residual
group is the difference between the total
fair market value of the transferred
properties in that exchange group or
residual group and the total adjusted basis
of the properties. For each exchange group,
recognized gain is the lesser of the gain
realized or the exchange group deficiency
(if any). Losses are not recognized for an
exchange group. The total gain recognized on
the exchange of like-kind or like-class
properties is the sum of all the gain
recognized for each exchange group.
For a residual group, you must recognize the
entire gain or loss realized.
For properties you transfer that are not
within any exchange group or the residual
group, figure realized and recognized gain
or loss as explained under
Gain or Loss From
Sales and Exchanges, earlier.
Example.
Based on the facts in the previous
example, Karen recognizes gain on the
exchange as follows.
For the first exchange group, the gain
realized is the fair market value of
computer A ($1,000) minus its adjusted
basis ($375), or $625. The gain
recognized is the lesser of the gain
realized, $625, or the exchange group
deficiency, $-0-.
For the second exchange group, the gain
realized is the fair market value of
automobile A ($4,000) minus its adjusted
basis ($1,500), or $2,500. The gain
recognized is the lesser of the gain
realized, $2,500, or the exchange group
deficiency, $1,050.
The total gain recognized by Karen in
the exchange is the sum of the gains
recognized with respect to both exchange
groups ($-0- + $1,050), or $1,050.
Basis of properties
received. The total basis of
properties received in each exchange group
is the sum of the following amounts.
-
The total adjusted basis of the
transferred properties within that
exchange group.
-
Your recognized gain on the exchange
group.
-
The excess liabilities you assume
that are allocated to the group.
-
The exchange group surplus (or minus
the exchange group deficiency).
You allocate the total basis of each
exchange group proportionately to each
property received in the exchange group
according to the property's fair market
value.
The basis of each property received within
the residual group (other than money) is
equal to its fair market value.
Example.
Based on the facts in the two previous
examples, the bases of the properties
received by Karen in the exchange,
printer B and automobile B, are
determined in the following manner.
The basis of the property received in
the first exchange group is $1,425. This
is the sum of the following amounts.
-
Adjusted basis of the property
transferred within that exchange
group ($375).
-
Gain recognized for that
exchange group ($-0-).
-
Excess liabilities assumed
allocated to that exchange group
($-0-).
-
Exchange group surplus ($1,050).
Printer B is the only property received
within the first exchange group, so the
entire basis of $1,425 is allocated to
printer B.
The basis of the property received in
the second exchange group is $1,500.
This is figured as follows.
First, add the following amounts.
-
Adjusted basis of the property
transferred within that exchange
group ($1,500).
-
Gain recognized for that
exchange group ($1,050).
-
Excess liabilities assumed
allocated to that exchange group
($-0-).
Then subtract the exchange group
deficiency ($1,050).
Automobile B is the only property
received within the second exchange
group, so the entire basis ($1,500) is
allocated to automobile B.
Like-Kind Exchanges Between Related
Persons
Special rules apply to like-kind exchanges
between related persons. These rules affect both
direct and indirect exchanges. Under these
rules, if either person disposes of the property
within 2 years after the exchange, the exchange
is disqualified from nonrecognition treatment.
The gain or loss on the original exchange must
be recognized as of the date of the later
disposition.
Related persons Under
these rules, related persons include, for
example, you and a member of your family
(spouse, brother, sister, parent, child,
etc.), you and a corporation in which you
have more than 50% ownership, you and a
partnership in which you directly or
indirectly own more than a 50% interest of
the capital or profits, and two partnerships
in which you directly or indirectly own more
than 50% of the capital interests or
profits.
An exchange structured to avoid the related
party rules is not a like-kind exchange. See
Like-Kind Exchanges Using Qualified
Intermediaries, earlier.
For more information on related persons, see
Nondeductible Loss under
Sales and
Exchanges Between Related Persons
in chapter 2.
Example.
You used a panel truck in your house
painting business. Your sister used a
pickup truck in her landscaping
business. In December 2006, you
exchanged your panel truck plus $200 for
your sister's pickup truck. At that
time, the fair market value (FMV) of
your panel truck was $7,000 and its
adjusted basis was $6,000. The fair
market value of your sister's pickup
truck was $7,200 and its adjusted basis
was $1,000. You realized a gain of
$1,000 (the $7,200 fair market value of
the pickup truck minus the $200 you paid
minus the $6,000 adjusted basis of the
panel truck). Your sister realized a
gain of $6,200 (the $7,000 fair market
value of your panel truck plus the $200
you paid minus the $1,000 adjusted basis
of the pickup truck).
However, because this was a like-kind
exchange, you recognized no gain. Your
basis in the pickup truck was $6,200
(the $6,000 adjusted basis of the panel
truck plus the $200 you paid). Your
sister recognized gain only to the
extent of the money she received, $200.
Her basis in the panel truck was $1,000
(the $1,000 adjusted basis of the pickup
truck minus the $200 received, plus the
$200 gain recognized).
In 2007, you sold the pickup truck to a
third party for $7,000. You sold it
within 2 years after the exchange, so
the exchange is disqualified from
nonrecognition treatment. On your 2007
tax return, you must report your $1,000
gain on the 2006 exchange. You also
report a loss on the sale of $200 (the
adjusted basis of the pickup truck,
$7,200 (its $6,200 basis plus the $1,000
gain recognized), minus the $7,000
realized from the sale).
In addition, your sister must report on
her 2007 tax return the $6,000 balance
of her gain on the 2006 exchange. Her
adjusted basis in the panel truck is
increased to $7,000 (its $1,000 basis
plus the $6,000 gain recognized).
Two-year holding period.
The 2-year holding period begins on the
date of the last transfer of property that
was part of the like-kind exchange. If the
holder's risk of loss on the property is
substantially diminished during any period,
however, that period is not counted toward
the 2-year holding period. The holder's risk
of loss on the property is substantially
diminished by any of the following events.
-
The holding of a put on the
property.
-
The holding by another person of a
right to acquire the property.
-
A short sale or other transaction.
A put is an option that entitles the holder
to sell property at a specified price at any
time before a specified future date.
A short sale involves property you
generally do not own. You borrow the
property to deliver to a buyer and, at a
later date, buy substantially identical
property and deliver it to the lender.
Exceptions to the rules for
related persons. The following kinds
of property dispositions are excluded from
these rules.
-
Dispositions due to the death of
either related person.
-
Involuntary conversions.
-
Dispositions if it is established to
the satisfaction of the IRS that
neither the exchange nor the
disposition had as a main purpose
the avoidance of federal income tax.
Other Nontaxable Exchanges
The following discussions describe other exchanges
that may not be taxable.
Exchanges of partnership interests do not
qualify as nontaxable exchanges of like-kind
property. This applies regardless of whether
they are general or limited partnership
interests or are interests in the same
partnership or different partnerships. However,
under certain circumstances the exchange may be
treated as a tax-free contribution of property
to a partnership. See Publication 541,
Partnerships.
An interest in a partnership that has a valid
election to be excluded from being treated as a
partnership for federal tax purposes is treated
as an interest in each of the partnership assets
and not as a partnership interest. See
Publication 541.
U.S. Treasury Notes or Bonds
Certain issues of U.S. Treasury obligations may
be exchanged for certain other issues designated
by the Secretary of the Treasury with no gain or
loss recognized on the exchange. See
U.S. Treasury Bills,
Notes, and Bonds under
Interest Income
in Publication 550 for more information
on the tax treatment of income from these
investments.
Insurance Policies and Annuities
No gain or loss is recognized if you make any of
the following exchanges.
-
A life insurance contract for another or
for an endowment or annuity contract.
-
An endowment contract for an annuity
contract or for another endowment
contract providing for regular payments
beginning at a date not later than the
beginning date under the old contract.
-
One annuity contract for another if the
insured or annuitant remains the same.
-
A portion of an annuity contract for a
new annuity contract if the insured or
annuitant remains the same.
If you realize a gain on the exchange of an
endowment contract or annuity contract for a
life insurance contract or an exchange of an
annuity contract for an endowment contract, you
must recognize the gain.
For information on transfers and rollovers of
employer-provided annuities, see Publication
575, Pension and Annuity Income, or Publication
571, Tax-Sheltered Annuity Plans (403(b) Plans).
Cash received. The
nonrecognition and nontaxable transfer rules
do not apply to a rollover in which you
receive cash proceeds from the surrender of
one policy and invest the cash in another
policy. However, you can treat a cash
distribution and reinvestment as meeting the
nonrecognition or nontaxable transfer rules
if all the following requirements are met.
-
When you receive the distribution,
the insurance company that issued
the policy or contract is subject to
a rehabilitation, conservatorship,
insolvency, or similar state
proceeding.
-
You withdraw all amounts to which
you are entitled or, if less, the
maximum permitted under the state
proceeding.
-
You reinvest the distribution within
60 days after receipt in a single
policy or contract issued by another
insurance company or in a single
custodial account.
-
You assign all rights to future
distributions to the new issuer for
investment in the new policy or
contract if the distribution was
restricted by the state proceeding.
-
You would have qualified under the
nonrecognition or nontaxable
transfer rules if you had exchanged
the affected policy or contract for
the new one.
If you do not reinvest all of the cash
distribution, the rules for partially
nontaxable exchanges, discussed earlier,
apply.
In addition to meeting these five
requirements, you must do both the
following.
-
Give to the issuer of the new policy
or contract a statement that
includes all the following
information.
-
The gross amount of cash
distributed.
-
The amount reinvested.
-
Your investment in the
affected policy or contract
on the date of the initial
cash distribution.
-
Attach the following items to your
timely filed tax return for the year
of the initial distribution.
-
A statement titled “Election
under Rev. Proc. 92-44”
that includes the name of
the issuer and the policy
number (or similar
identifying number) of the
new policy or contract.
-
A copy of the statement
given to the issuer of the
new policy or contract.
Property Exchanged for Stock
If you transfer property to a corporation in
exchange for stock in that corporation (other
than nonqualified preferred stock, described
later), and immediately afterward you are in
control of the corporation, the exchange is
usually not taxable. This rule applies both to
individuals and to groups who transfer property
to a corporation. It does not apply in the
following situations.
-
The corporation is an investment
company.
-
You transfer the property in a
bankruptcy or similar proceeding in
exchange for stock used to pay
creditors.
-
The stock is received in exchange for
the corporation's debt (other than a
security) or for interest on the
corporation's debt (including a
security) that accrued while you held
the debt.
Control of a corporation.
To be in control of a corporation, you or
your group of transferors must own,
immediately after the exchange, at least 80%
of the total combined voting power of all
classes of stock entitled to vote and at
least 80% of the total number of shares of
all other classes of stock of the
corporation.
The control requirement can be met even
though there are successive transfers of
property and stock. For more information,
see Revenue Ruling 2003-51 in Internal
Revenue Bulletin 2003-21.
Example 1.
You and Bill Jones buy property for
$100,000. You both organize a
corporation when the property has a fair
market value of $300,000. You transfer
the property to the corporation for all
its authorized capital stock, which has
a par value of $300,000. No gain is
recognized by you, Bill, or the
corporation.
Example 2.
You and Bill transfer the property with
a basis of $100,000 to a corporation in
exchange for stock with a fair market
value of $300,000. This represents only
75% of each class of stock of the
corporation. The other 25% was already
issued to someone else. You and Bill
recognize a taxable gain of $200,000 on
the transaction.
Services rendered.
The term property does not include
services rendered or to be rendered to the
issuing corporation. The value of stock
received for services is income to the
recipient.
Example.
You transfer property worth $35,000 and
render services valued at $3,000 to a
corporation in exchange for stock valued
at $38,000. Right after the exchange,
you own 85% of the outstanding stock. No
gain is recognized on the exchange of
property. However, you recognize
ordinary income of $3,000 as payment for
services you rendered to the
corporation.
Property of relatively
small value. The term property does
not include property of a relatively small
value when it is compared to the value of
stock and securities already owned or to be
received for services by the transferor if
the main purpose of the transfer is to
qualify for the nonrecognition of gain or
loss by other transferors.
Property transferred will not be considered
to be of relatively small value if its fair
market value is at least 10% of the fair
market value of the stock and securities
already owned or to be received for services
by the transferor.
Stock received in
disproportion to property transferred.
If a group of transferors exchange
property for corporate stock, each
transferor does not have to receive stock in
proportion to his or her interest in the
property transferred. If a disproportionate
transfer takes place, it will be treated for
tax purposes in accordance with its true
nature. It may be treated as if the stock
were first received in proportion and then
some of it used to make gifts, pay
compensation for services, or satisfy the
transferor's obligations.
Money or other property
received. If, in an otherwise
nontaxable exchange of property for
corporate stock, you also receive money or
property other than stock, you may have to
recognize gain. You must recognize gain only
up to the amount of money plus the fair
market value of the other property you
receive. The rules for figuring the
recognized gain in this situation generally
follow those for a partially nontaxable
exchange discussed earlier under
Like-Kind
Exchanges. If the property you
give up includes depreciable property, the
recognized gain may have to be reported as
ordinary income from depreciation. See
chapter 3. No loss is recognized.
Nonqualified preferred
stock. Nonqualified preferred
stock is treated as property other than
stock. Generally, it is preferred stock with
any of the following features.
-
The holder has the right to require
the issuer or a related person to
redeem or buy the stock.
-
The issuer or a related person is
required to redeem or buy the stock.
-
The issuer or a related person has
the right to redeem or buy the stock
and, on the issue date, it is more
likely than not that the right will
be exercised.
-
The dividend rate on the stock
varies with reference to interest
rates, commodity prices, or similar
indices.
For a detailed definition of nonqualified
preferred stock, see section 351(g)(2) of
the Internal Revenue Code.
Liabilities If
the corporation assumes your liabilities,
the exchange generally is not treated as if
you received money or other property. There
are two exceptions to this treatment.
-
If the liabilities the corporation
assumes are more than your adjusted
basis in the property you transfer,
gain is recognized up to the
difference. However, if the
liabilities assumed give rise to a
deduction when paid, such as a trade
account payable or interest, no gain
is recognized.
-
If there is no good business reason
for the corporation to assume your
liabilities, or if your main purpose
in the exchange is to avoid federal
income tax, the assumption is
treated as if you received money in
the amount of the liabilities.
For more information on the assumption of
liabilities, see section 357(d) of the
Internal Revenue Code.
Example.
You transfer property to a corporation
for stock. Immediately after the
transfer, you control the corporation.
You also receive $10,000 in the
exchange. Your adjusted basis in the
transferred property is $20,000. The
stock you receive has a fair market
value (FMV) of $16,000. The corporation
also assumes a $5,000 mortgage on the
property for which you are personally
liable. Gain is realized as follows.
The liability assumed is not treated as
money or other property. The recognized gain
is limited to $10,000, the cash received.
No
gain or loss is recognized on a transfer of property
from an individual to (or in trust for the benefit of) a
spouse, or a former spouse if incident to divorce. This
rule does not apply to the following.
-
The recipient of the transfer is a nonresident
alien.
-
A transfer in trust to the extent the
liabilities assumed and the liabilities on the
property are more than the property's adjusted
basis.
-
A transfer of certain stock redemptions, as
discussed in section 1.1041-2 of the
regulations.
Any
transfer of property to a spouse or former spouse on
which gain or loss is not recognized is treated by the
recipient as a gift and is not considered a sale or
exchange. The recipient's basis in the property will be
the same as the adjusted basis of the property to the
giver immediately before the transfer. This carryover
basis rule applies whether the adjusted basis of the
transferred property is less than, equal to, or greater
than either its fair market value at the time of
transfer or any consideration paid by the recipient.
This rule applies for determining loss as well as gain.
Any gain recognized on a transfer in trust increases the
basis.
For
more information on transfers to a spouse, see
Property Settlements
in Publication 504, Divorced or Separated
Individuals.
Rollover of Gain From Publicly Traded
Securities
You
can elect to roll over a capital gain from the sale of
publicly traded securities (securities traded on an
established securities market) into a specialized small
business investment company (SSBIC). If you make this
election, the gain from the sale is recognized only to
the extent the amount realized is more than the cost of
the SSBIC common stock or partnership interest bought
during the 60-day period beginning on the date of the
sale (and did not previously take into account on an
earlier sale of publicly traded securities). You must
reduce your basis in the SSBIC stock or partnership
interest by the gain not recognized.
The
gain that can be rolled over during any tax year is
limited. For individuals, the limit is the lesser of the
following amounts.
-
$50,000 ($25,000 for married individuals filing
separately).
-
$500,000 ($250,000 for married individuals
filing separately) minus the gain rolled over in
all earlier tax years.
For
more information, see chapter 4 of Publication 550.
For
C corporations, the limit is the lesser of the following
amounts.
-
$250,000.
-
$1 million minus the gain rolled over in all
earlier tax years.
Sales of Small Business Stock
If
you sell qualified small business stock, you may be able
to roll over your gain tax free or exclude part of the
gain from your income. Qualified small business stock is
stock originally issued by a qualified small business
after August 10, 1993, that meets all 7 tests listed in
chapter 4 of Publication 550.
Rollover of gain. You can
elect to roll over a capital gain from the sale of
qualified small business stock held longer than 6
months into other qualified small business stock.
This election is not allowed to C corporations. If
you make this election, the gain from the sale
generally is recognized only to the extent the
amount realized is more than the cost of the
replacement qualified small business stock bought
within 60 days of the date of sale. You must reduce
your basis in the replacement qualified small
business stock by the gain not recognized.
Exclusion of gain. You may be
able to exclude from your gross income 50% of your
gain from the sale or exchange of qualified small
business stock you held more than 5 years. This
exclusion is not allowed to C corporations.
Different rules apply when the stock is held by a
partnership, S corporation, regulated investment
company, or common trust fund.
Your gain from the stock of any one issuer that is
eligible for the exclusion is limited to the greater
of the following amounts.
-
Ten times your basis in all qualified stock
of the issuer you sold or exchanged during
the year.
-
$10 million ($5 million for married
individuals filing separately) minus the
gain from the stock of the same issuer you
used to figure your exclusion in earlier
years.
More information. For more
information on sales of small business stock, see
chapter 4 of Publication 550.
Rollover of Gain From Sale of Empowerment
Zone Assets
You
may qualify for a tax-free rollover of certain gains
from the sale of qualified empowerment zone assets. This
means that if you buy certain replacement property and
make the election described in this section, you
postpone part or all of the recognition of your gain.
You
can make this election if you meet all the following
tests.
-
You hold a qualified empowerment zone asset for
more than 1 year and sell it at a gain.
-
Your gain from the sale is a capital gain.
-
During the 60-day period beginning on the date
of the sale, you buy a replacement qualified
empowerment zone asset in the same zone as the
asset sold.
Any
part of the gain that is ordinary income cannot be
postponed and must be recognized.
Qualified empowerment zone asset.
This means certain stock or partnership interests
in an enterprise zone business. It also includes
certain tangible property used in an enterprise zone
business. You must have acquired the asset after
December 21, 2000.
Amount of gain recognized. If
you make the election described in this section, the
gain on the sale is generally recognized only to the
extent, if any, that the amount realized on the sale
exceeds the cost of the qualified empowerment zone
asset that you bought during the 60-day period
beginning on the date of sale (and did not
previously take into account in rolling over gain on
an earlier sale of qualified empowerment zone
assets).
If this amount is equal to or more than the amount
of your gain, you must recognize the full amount of
your gain. If this amount is less than the amount of
your gain, you can postpone the rest of your gain by
adjusting the basis of your replacement property as
described next.
Basis of replacement property.
You must subtract the amount of postponed gain
from the basis of the qualified empowerment zone
assets you bought as replacement property.
More information. For more
information about empowerment zones, see Publication
954, Tax Incentives for Distressed Communities. For
more information about this rollover of gain, see
the Instructions for Form 4797 and Schedule D (Form
1040). Also, see section 1397B of the Internal
Revenue Code.
Exclusion of Gain From Sale of DC Zone
Assets
If
you sold or exchanged a District of Columbia Enterprise
Zone (DC Zone) asset that you held for more than 5
years, you may be able to exclude the “qualified
capital gain.” The qualified gain is, generally,
any gain recognized in a trade or business that you
would otherwise include on Form 4797, Part I. This
exclusion also applies to an interest in, or property
of, certain businesses operating in the District of
Columbia.
DC Zone asset. A DC Zone
asset is any of the following.
-
DC Zone business stock.
-
DC Zone partnership interest.
-
DC Zone business property.
Qualified capital gain. The
qualified capital gain is any gain recognized on the
sale or exchange of a DC Zone asset that is a
capital asset or property used in a trade or
business. It does not include any of the following
gains.
-
Gain treated as ordinary income under
section 1245;
-
Gain treated as unrecaptured section 1250
gain. The section 1250 gain must be figured
as if it applied to all depreciation rather
than the additional depreciation;
-
Gain attributable to real property, or an
intangible asset, which is not an integral
part of a DC Zone business; and
-
Gain from a related-party transaction. See
Sales and
Exchanges Between Related Persons
in chapter 2.
See Publication 954 and section 1400B for more
details on DC Zone assets and special rules.
NOTE: This is an
IRS Publication
|