Assets Received as Part of an Exchange
Assets Received as Part of an Exchange:
Taxable Exchanges - A taxable exchange is one on the which the gain is taxable, or the loss is deductible. If you receive property in exchange for other property in a taxable exchange, the basis of property you received is usually its FMV at the time of exchange.
Involuntary Exchanges - If you acquire property as a result of an involuntary exchange, such as a casualty, theft, or condemnation, you may figure the basis of the replacement property you acquire using the basis of the property you exchanged.
Similar or related property - If you receive property that is similar or related in service or use to the property exchanged, the new property's basis is the old property's basis on the date of the exchange with the following adjustments:
Decreased by -
a) Any loss recognized on the exchange, and
b) Any money received that was not spent on similar property.
Increased by -
a) Any gain recognized on the exchange, and
b) Any cost of acquiring replacement property.
Non similar or related property - If you receive money or other property that is not similar or related in service or use to the old property, and you buy new property that is similar or related in service or use to the old property, the basis of the new property is the cost of the new property, decreased by the amount of gain that is not recognized on the exchange.
Allocating the basis - If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs.
Nontaxable Exchanges - A nontaxable exchange is an exchange in which any gain is not taxed and any loss can not be deducted. If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you exchanged.
Like-Kind Exchanges - The exchange of property for the same kind of property is the most common type of nontaxable exchange. To qualify as a like-kind exchange, both the property you exchange and the property you receive must be held by you for business or investment purposes. There must be an exchange of like property. The basis of the property you you receive is the same as the basis of the property you gave up. For additional information see IRS Publication 544, Like-Kind Exchanges.
Exchange expenses - Exchange expenses are generally the closing costs that you pay. They include such items as attorney fees, deed preparation fees, etc. Add them to the basis of the like-kind received. If you trade property in a nontaxable exchange and pay money, the basis of the property received is the basis of the property exchanged increased by the money paid.
Special Rules for Related Persons - If a like-kind exchange is made directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange is disqualified from like-kind exchange treatment. Each person must report any gain or loss not recognized on the original exchange. Each person reports it on the tax return filed for the year in which the later disposition occurred. If this special rule applies, the basis in the property received in the original exchange will be its fair market value.
Theses rules generally do not apply to dispositions due to:
- The death of either related person
- Involuntary conversions, or
- Exchanges whose main purpose is not the avoidance of federal income tax.
Related persons - Related persons are ancestors, lineal descendents, brothers and sisters (whole or half), and a spouse. For other related persons (i.e., two or more corporations, an individual and a corporation, a grantor and fiduciary, etc.) see chapter 2 of IRS Publication 544, Nondeductible Loss.
Exchange of businesses - Exchanging the assets of one business for the assets of another business is a multiple asset exchange. For information on determining basis in a multiple asset exchange see IRS Publication 544, Multiple Property Exchanges.
Partially Nontaxable Exchange - A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. The basis of the property you receive is the basis of the old property with the following adjustments:
Decreased by -
a) Any money you received, and
b) Any loss recognized on the exchange.
Increased by -
a) Any additional costs incurred, and
b) Any gain recognized on the exchange.
The other party to the transaction who assumes your liabilities (including a nonrecourse obligation) treats them as money transferred to you in the exchange. Allocate the basis among the properties, other than money, you received in the exchange. In making this allocation, the basis of the unlike property is its FMV on the date of the exchange. The remainder is the basis of the like property.