Tax Planning: Basis of Property Acquired Under Code Secs 1031 or 1033
In certain types of transactions there are opportunities for taxpayers to defer gain on the exchange of property, including like-kind exchanges and involuntary conversions. Like-kind exchanges offer tax planning opportunities to defer gain on the exchange real property held for business use or for investment in exchange for similar replacement property. An involuntary conversion is the receipt of replacement property as a result of a casualty, theft, destruction, or condemnation.
In both transaction types, the gain is deferred until a taxable sale or exchange occurs. Taxpayers will need to calculate the basis of the replacement property for the future reporting and treatment as a gain or loss. To figure your gain or loss on a sale, exchange, or disposition of property, taxpayers must make certain adjustments to the basis of property.
Basis in like-kind exchanges
The basis of the property you receive is generally the same as the basis of the property you gave up. If you receive money in addition to property, the basis of the property received is the same as the basis of the property you gave up and include adjustments for: cash paid, cash received, exchange expenses, and any gain recognized.
Basis in involuntary conversions
The basis of replacement property similar or related in service or use to the converted property received is the old property’s basis on the date of conversion and includes adjustments. Adjustments are made for the following: money received and not spent on similar replacement property, gain or loss on conversion, and expenses for acquiring the replacement property. If multiple replacement properties are acquired an allocation is required for the basis.
Reporting is required in the year of the like-kind exchange to calculate the amount of gain deferred as well as the basis of the like-kind property received in the year of the transaction. Additionally, report the dates of sale and identification of the relinquished and replacement properties and if any cash received, report the amount of gain recognized for the cash or property received. For involuntary conversions, report the gain or loss on your return in the year you realize the gain or loss. Limitations may apply on losses from both transaction types.
Please call our office (214-731-7664) if you would like more information on calculating the basis of property received in a like-kind exchange and involuntary conversion. We are here to assist you and can prepare the computations and required reporting.