Client Letter - What this idea is about  

A LIKE KIND EXCHANGE IS A "NONTAXABLE" EXCHANGE"

Certain exchanges of property are not taxable. This means that any gain from the exchange is not taxed, 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.

A nontaxable exchange is an exchange in which any gain is not taxed and any loss is not deductible. If you get property in a nontaxable exchange, its basis is usually the same as the basis of the property exchanged.

"LIKE-KIND EXCHANGES" ~ The exchange of property for the same kind of property is the most common type of nontaxable exchange. If you trade business or investment property for other business or investment property of a like kind, you must postpone tax on the gain or postpone deducting the loss until you sell or dispose of the property you receive. To be nontaxable, a trade must meet ALL SIX of certain conditions. 

1. The property must be business or investment property (neither property may be property used for personal purposes, such as your home or family car).

2. The property must not be property held primarily for sale (such as merchandise).

3. There must be an exchange of like property. The exchange of real estate for real estate and the exchange of personal property for similar personal property are exchanges of like property. The trade of an apartment house for a store building, or a panel truck for a pickup truck, is a like-kind exchange. The exchange of a piece of machinery for a store building is NOT a like-kind exchange, neither is the exchange of livestock of one sex for live-stock of the other sex.  

4. The property must NOT be stocks, bonds, notes, choses in action, certificates of trust or beneficial interests, or other securities or evidences of indebtedness or interest, including partnership interests.

5. The property to be received must be IDENTIFIED by the day that is 45 DAYS after the date of transfer of the property given up in the exchange. 

6. The property to be received must be RECEIVED by the earlier of: 

   1. The 180th DAY after the date on which you transfer the property given up in the trade, or 

   2. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.

CAUTION. A loss is never deductible in a nontaxable exchange even if you receive unlike property or cash.

Engagement Status Letter 

You have not engaged Bob Parrish CPA PC, Bob Parrish CPA, pro1040, Consulting on line, any related parties, or the ISP to perform any services for you or offer you advice.  This entire site is for educational or informational purposes only.   You are not to use the forms, concepts, strategies, or knowledge without assistance from a professional.   The author, the corporation, the ISP, Bob Parrish CPA, Bob Parrish CPA, P.C. or other parties related to those or this site do not guarantee or warrantee in any manner the suitability, usefulness, accuracy, timeliness, or results of any portions of this site, nor the links contained in this site which link to other areas.   At times, information is taken from other sources and is believed to be accurate, but no verification or confirmation is performed.  Furthermore, if any federal or state law invalidates a portion of this disclaimer, the other portions still apply.   In addition, any allegations or actions are restricted to arbitration only and must be arbitrated by the Better Business Bureau in Sarasota Florida.  Reading of these pages constitutes complete acceptance and agreement with all disclaimer provisions on all pages of this site. ....... Thursday, February 22, 2007 02:28 AM  

TOP

Learning Objectives (What You Asked) 

YOUR QUESTION(S)

What is a Like Kind Exchange

TOP

What You Will Need  

Plain English Analysis What it does, Why it works - The Answer, Alternatives  

Click on the title to expand or collapse the topics

• Plain English Analysis - Your Answers
  • What it Does
  • Why or How it works
  • Alternatives
  • Cost v. Benefits Analysis

YOUR ANSWERS

What it does, Explanation of this topic and how it may affect you:

The rules for like-kind exchanges do not apply to exchanges of the following property, these do not qualify..

• 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.

Like Property

There must be an exchange of like property. The exchange of real estate for real estate and the exchange of personal property for similar personal property are exchanges of like 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. Nor does the exchange of livestock of different sexes 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 and character of the two property interests are 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.

1. Office furniture, fixtures, and equipment (asset class 00.11).
2. Information systems, such as computers and peripheral equipment (asset class 00.12).
3. Data handling equipment except computers (asset class 00.13).
4. 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).
5. Automobiles and taxis (asset class 00.22).
6. Buses (asset class 00.23).
7. Light general purpose trucks (asset class 00.241).
8. Heavy general purpose trucks (asset class 00.242).
9. Railroad cars and locomotives except those owned by railroad transportation companies (asset class 00.25).
10. Tractor units for use over the road (asset class 00.26).
11. Trailers and trailer-mounted containers (asset class 00.27).
12. Vessels, barges, tugs, and similar water-transportation equipment, except those used in marine construction (asset class 00.28).
13. Industrial steam and electric generation or distribution systems (asset class 00.4).

Product Classes. Product Classes include property listed in a 4-digit product class (except any ending in "9," a miscellaneous category) in Division D of the Standard Industrial Classification codes of the Executive Office of the President, Office of Management and Budget, Industrial Classification Manual (Manual). Copies of the Manual may be obtained from the National Technical Information Service, an agency of the U.S. Department of Commerce. To order the manual, call the National Technical Information Service at 1-800-553-6847.

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. 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.

This rule does not apply to any transfer under a written binding contract in effect on June 8, 1997, and at all times thereafter before the disposition of property. A contract will not fail to be binding solely because it provides for a sale in lieu of an exchange or the property to be acquired as replacement property was not identified under that contract before June 9, 1997.

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.

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 treatment. Each person must report any gain or loss recognized on the original exchange. These 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 income tax.

PARTIALLY NONTAXABLE EXCHANGES

If, in addition to like property, you receive money or unlike property in an exchange in 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.

To figure the amount of taxable gain, first determine the fair market value of any unlike property you receive and add it to the amount of any money you receive. The total is the maximum amount of gain that can be taxed. Next, figure the amount of 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.

To figure the amount of taxable gain: 

• Determine the FMV of any unlike property received and ADD it to the amount of any money received. The total is the maximum amount of gain that can be taxed.
• Figure the amount of gain on the whole exchange. The 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 that 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.

FMV of like property received	$10,000
Cash	1,000
Mortgage treated as assumed by other party	3,000
Total received	$14,000
Minus: Exchange expenses	(500)
Amount realized	$13,500
Minus: Adjusted basis of property you transferred	(8,000)
Realized gain	$ 5,500

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 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 its adjusted basis.

Example. You exchange stock and real estate that you held for investment for real estate that 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 have a taxable 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.

1. Add--
   1. Any additional costs you incur, and
   2. Any gain you recognize on the exchange.
2. Subtract--
   1. Any money you receive, and
   2. Any loss you recognize on the exchange.

For more information, see Publication 551.

Multiple Property Exchanges

Under the like-kind exchange rules, you must generally 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.

Exchange groups. Each exchange group consists of properties transferred and received in the exchange that are of like kind or like classes. (See Like 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 nonrecourse 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 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, demand deposits and like accounts, 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 a portion 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.

	Fair Market Value	Liability
Ben Transfers:
Computer A	$1,500	$ -0-
Automobile A	2,500	500
Truck A	2,000	-0-
Ben Receives:
Computer R	$1,600	$ -0-
Automobile R	3,100	750
Truck R	1,400	250
Cash	400

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).

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.

The money and properties allocated to the residual group are considered to come from the following assets in the following order.

1. Cash, demand deposits and like accounts, and similar items.
2. Certificates of deposit, U.S. Government securities, readily marketable stock or securities, and foreign currency.
3. All other assets except section 197 intangibles.
4. Section 197 intangibles (other than goodwill and going concern value). See chapter 2.
5. Section 197 intangibles in the nature of goodwill and going concern value.

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.

	Fair Market Value
Fran Transfers:
Computer A	$1,000
Automobile A	4,000
Fran Receives:
Printer B	$ 800
Automobile B	2,950
Corporate Stock	750
Cash	500

Because 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), 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.

	Adjusted Basis	Fair Market Value
Karen Transfers:
Computer A	$ 375	$1,000
Automobile A	1,500	4,000
Karen Receives:
Printer B		$2,050
Automobile B		2,950

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 amount of gain realized is the fair market value of computer A ($1,000) minus its adjusted basis ($375), or $625. The amount of gain recognized is the lesser of the gain realized ($625) or the exchange group deficiency ($0), or $0.

For the second exchange group, the amount of gain realized is the fair market value of automobile A ($4,000) minus its adjusted basis ($1,500), or $2,500. The amount of gain recognized is the lesser of the gain realized ($2,500) or the exchange group deficiency ($1,050), or $1,050.

The total amount of 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.

1. The total adjusted basis of the transferred properties within that exchange group.
2. Your recognized gain on the exchange group.
3. The excess liabilities you assume that are allocated to the group.
4. The exchange group surplus (or minus the exchange group deficiency).

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.

1. The adjusted basis of the property transferred within that exchange group ($375).
2. The amount of gain recognized for that exchange group ($0).
3. The amount of excess liabilities assumed allocated to that exchange group ($0).
4. The amount of the exchange group surplus ($1,050).

The basis of the property received in the second exchange group is $1,500. This is figured as follows.

First, add the following amounts.

1. The adjusted basis of the property transferred within that exchange group ($1,500).
2. The amount of gain recognized for that exchange group ($1,050).
3. The amount of excess liabilities assumed allocated to that exchange group ($0).

Because automobile B is the only property received within the second exchange group, the entire basis of $1,500 is allocated to automobile B.

Like-Kind Exchanges Between Related Persons

Special rules apply to like-kind exchanges made 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 that 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.

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 station wagon in her landscaping business. In December 1998, you exchanged your truck, plus $200, for your sister's station wagon. At that time, the fair market value (FMV) of your truck was $7,000 and its adjusted basis was $6,000. The FMV of your sister's station wagon was $7,200 and its adjusted basis was $1,000. You realized a gain of $1,000 (the $7,200 FMV of the station wagon minus the $200 you paid minus the $6,000 adjusted basis of the truck). Your sister realized a gain of $6,200 (the $7,000 FMV of your truck plus the $200 you paid minus the $1,000 adjusted basis of the station wagon).

However, because this was a like-kind exchange, you recognized no gain. Your basis in the station wagon was $6,200 (the $6,000 adjusted basis of the truck plus the $200 you paid). Your sister recognized gain only to the extent of the money she received, $200. Her basis in the truck was $1,000 (the $1,000 adjusted basis of the station wagon minus the $200 received, plus the $200 gain recognized).

In 1999, you sold the station wagon to a third party for $7,000. Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. On your 1999 tax return, you must report your $1,000 gain on the 1998 exchange. You also report a loss on the sale of $200 (the adjusted basis of the station wagon, $7,200 (its $6,200 basis plus the $1,000 gain recognized) minus the $7,000 amount realized from the sale).

In addition, your sister must report on her 1999 tax return the $6,000 balance of her gain on the 1998 exchange. Her adjusted basis in the 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.

Partnership Interests

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 some circumstances such an exchange may be treated as a tax-free contribution of property to a partnership. See Contribution of Property in Publication 541, Partnerships.

An interest in a partnership that has a valid choice in effect under section 761(a) of the Internal Revenue Code to be excluded from all the rules of Subchapter K of the Code is treated as an interest in each of the partnership assets and not as a partnership interest. See Exclusion From Partnership Rules in 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.

For other information on these notes and bonds, call the Bureau of the Public Debt at (202) 874-4000, or write to the following address.
Attn: Customer Information
Bureau of the Public Debt
P.O. Box 1328
Parkersburg, WV 26106-1328

Or, on the Internet, visit:
www.publicdebt.treas.gov

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.

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 Programs for Employees of Public Schools and Certain Tax-Exempt Organizations.

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.

1. 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.
2. You withdraw all amounts to which you are entitled or the maximum amount permitted under the state proceeding.
3. 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.
4. 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.
5. You would have qualified under the nonrecognition or nontaxable transfer rules if you had exchanged the affected policy or contract for the new one.

In addition to meeting these five requirements, you must do both the following.

1. Give to the issuer of the new policy or contract a statement that includes all the following information.
   1. The gross amount of cash distributed.
   2. The amount reinvested.
   3. The amount of your investment in the affected policy or contract on the date of the initial cash distribution.
2. Attach the following items to your timely filed tax return for the year of the initial distribution.
   1. A statement entitled "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.
   2. 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 afterwards 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 outstanding shares of each class of nonvoting stock.

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 included in income 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 included in income 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 a taxable gain. You are taxed only up to the amount of money plus the fair market value of the other property you receive. The rules for figuring the taxable 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 taxable 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 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.

Liabilities. If the corporation assumes your liabilities, the exchange is not generally 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 amount of 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.

Example. You transfer property to a corporation for stock. 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.

FMV of stock received	$16,000
Cash received	10,000
Liability assumed by corporation	5,000
Total received	$31,000
Minus: Adjusted basis of property transferred	20,000
Realized gain	$11,000

The liability assumed is not treated as money or other property. The recognized gain is limited to $10,000, the amount of cash received.

Deferred Exchanges

A deferred exchange is one in which you transfer property you use in business or hold for investment and, at a later time, 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 that is 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. Any property received during that time 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 FMV, on the date of transfer, of all properties you give up.

• 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 FMV of the property is at least 95% of the total FMV of all identified replacement properties. (Do not include any you canceled.) FMV 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 that is incidental to a larger item of property as separate from the larger item when you identify replacement property. Property is incidental to a larger item of property if it meets both the following tests.

• It is typically transferred with the larger item.
• The total FMV of all the incidental property is not more than 15% of the total FMV 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 FMV of the replacement property to identify it, estimate its FMV as of the date you expect to receive it.

To determine whether the replacement property you received qualifies as like-kind by being substantially the same as the property you identified, do not take into account any variations due to usual production changes. Substantial changes in the property to be produced, however, will disqualify it as like-kind property.

If your identified replacement property is personal property to be produced, it must be completed by the date you receive it to qualify as like-kind property.

If your identified replacement property is real property to be produced and it is not completed by the date you receive the property, it may still qualify as like-kind property. It will qualify as like-kind property only if, had it been completed on time, the property you received would have been considered to be substantially the same as the property you identified. It is considered to be substantially the same only to the extent the property received 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.)

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.

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 replacement 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.

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.

1. The intermediary acquires and transfers legal title to the property.
2. 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.
3. 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.

Start of Plain English Section

Why or How it works - Both Sides of the Equation and Examples:

Start of Plain English Section

Alternatives

Start of Plain English Section

Cost v. Benefit Analysis

Start of Plain English Section

Other

Start of Plain English Section

Reserved

Start of Plain English Section

TOP

Technical Analysis & Citations What It does, Why it works -

Click on the title to expand or collapse the topics

• Technical Analysis

  • Law

  • Regs

  • Cases

  • Revenue Procedures

  • Revenue Rulings

  • Private Letter Rulings

Commentary

Start of Technical Analysis

Law

Start of Law Section

Start of Technical Analysis

Regs

Start of Regs Section

Start of Technical Analysis

Cases

Start of Cases Section

Start of Technical Analysis

Revenue Procedures

Start of Revenue Procedures Section

Start of Technical Analysis

Revenue Rulings

Start of Revenue Rulings

Start of Technical Analysis

Private Letter Rulings

Start of Private Letter Rulings

Start of Technical Analysis

TOP

Tax Killers  

This is about Activity Based Taxplanning - maximizing deductions, minimizing cash outlay and maximizing the amount of cash retained and the net worth.  Activity Based Taxplanning (ABT) is a methodology developed by Bob Parrish CPA, that assists people with the tax issues by focusing on the activity (or actions - events) that are being undertaken or contemplated (or have already taken place).  The,  research is compiled from the myriad of sources to help you complete the activity with the least tax cost, while maintaining compliance the tax laws, other laws and regulations and place yourself in a position to protect your objectives.

Tax is a subject that many view in order to cut costs.  Taxes are a cost just as any other cost.  It happens this cost is somewhat intangible and is defined by legislation without a tangible item to view and control.  The money is spent and the control of the expenditure is more appropriately administered by someone trained in the law.

TOP

Cost Killers   Management Info Sys, Cost Acctg, Activity Based Costing)

 This is about Activity Based Costing  - methods to cut costs, management accounting, management information systems, decision support systems - in general about being a manager.

TOP

Preparing for your CPA, attorney, or preparing to start your own What to gather - 

  

How to Prepare For the CPA or Legal Counsel - Save the Professional Time - Save Your Money

Click on the title to expand or collapse the topics

• What to gather - an Organizer and Prepare for your CPA, Attorney or Financial Adviser

  • Entrance Interview

  • Exit Interview

  • From Banking Records

  • From Customer Records

  • From Signed Documents

  • From Your Other Business, or Financial Records

  • From Corporation or Organization Records (meetings, etc.)

  • What to do

 Entrance Interview

1041 Organizer

Exit Interview

From Banking Records

From Customer Records

From Signed Documents

From Your Other Business, or Financial Records

From Corporation Records or Organization Records (meetings, etc.) 

What to do

Start of Preparing For You CPA Section

TOP

Forms - checklists, time-line to do, etc. Assistance - What To Do - 

Click on the title to expand or collapse the topics

• How to do this - What to Do

  • Action Checklist - What To Do

  • OVERVIEW OF PROCEDURES

  • DETAILED STEPS

    • STARTING

    • PRINT ALL THE REQUIRED DOCUMENTS

    • PRESENTATION STANDARDS

    • OBTAIN THE STANDARD WORKPAPER FORMS NEEDED

    • OBTAIN THE DOCUMENTS FOR THIS JOB

  • FINAL OVERVIEW

  • FINAL STEPS

  • Forms - Checklists - Etc.

  • How to use the forms

Action Checklist - What To Do

OVERVIEW OF PROCEDURES

GENERAL SETUP & STARTUP

PRINT FORMS AND DOCUMENTS NEEDED

PRESENTATION STANDARDS

Back to Start of What To Do  

DETAILED STEPS

STARTING

FROM CLIENT OR BUSINESS RECORDS

CONTRACTS, BILLS OF SALE, AGREEMENTS, ETC.

LIST OF DOCUMENTS NEEDED

ORGANIZER

ENTRANCE INTERVIEW

EXIT INTERVIEW

Back to Start of What To Do  

OBTAIN THE ORGANIZER AND BE CERTAIN ALL INFORMATION IS AVAILABLE

GATHER AND SORT THE INFORMATION

OBTAIN THE WORKPAPER TITLE SHEETS

OBTAIN THE PRESENTATION TITLE SHEETS

OPEN ALL STANDARD DOCUMENTS

OVERVIEW THE ENTRANCE INTERVIEW FORM

OVERVIEW THE LIST OF INFORMATION AND CLIENT OR BUSINESS RECORDS NEEDED

START THE REQUIRED COMPUTER PROGRAMS

OBTAIN THE CHECKLISTS IF NEEDED AND WORK ON THE JOB BY EACH TYPE OF ACTIVITY OR EVENT

Back to Start of What To Do  

PRINT ALL THE REQUIRED DOCUMENTS OR MAKE COPIES AS NEEDED

PRESENTATION STANDARDS

DETERMINE THE CORRECT PRESENTATION STANDARD TO USE

ENGAGEMENT LETTER AND DISCLAIMER

PRESENTATION IN GENERAL

WHAT THE ENGAGEMENT IS LIMITED TO

WHAT SERVICES WERE PERFORMED

HOW THIS HELPS & BENEFITS

4 WAY TEST APPLICATION

Is it the TRUTH

Is it FAIR

Will it build GOODWILL and BETTER FRIENDSHIPS

Will it be BENEFICIAL to all

Back to Start of What To Do  

BEFORE FINALIZING THE WORK PROCESS CONSIDER THE FOLLOWING

Compliance

Paying Bills or other events

The professional should perform functions the client does not have time for

The  professional should perform necessary functions the client staff does not have training for

Reduce Costs

Reduce Risks

Setting Goals or objectives

Setting methods for monitoring

Setting dates, methods & procedures for follow-up

Setting guidelines for defining when variances from the guideline warrant policy or procedure changes

Identify the policies or procedures that need to be changed to accomplish the goal or objective

Back to Start of What To Do  

OBTAIN THE STANDARD WORKPAPER FORMS NEEDED

LIST OF THE STANDARD FORMS AND W/P NEEDED

Back to Start of What To Do  

OBTAIN THE DOCUMENTS FOR THIS JOB

PLACE BLANK FORMS IN THE CORRECT SEQUENCE

GENERAL & FOR ALL JOBS

Instructions for finalizing and completion - for example instructions for the mailing of forms to the IRS

Actions Checklist

Report Cover Letter

Required Documents and attachments

Back to Start of What To Do  

FINAL OVERVIEW BEFORE THE JOBS IS ENDED & CLOSED

LOOK AT THE ORIGINAL QUESTION - has it been answered, were more questions added?

THE ANSWER - limit the answer to a short paragraph of about 7 sentences.  Did this solve the issue?  The ANSWER is not considered the SOLUTION

THE SOLUTION - understand the objective or goal and restate it.  Were the goals met?  What might prevent obtaining the goals. Do the benefits outweigh the costs?  Reduce Costs?  Reduce Risks?  Setting Goals or objectives:

Setting methods for monitoring

Setting dates, methods & procedures for follow-up

Setting guidelines for defining when variances from the guideline warrant policy or procedure changes

Identify the policies or procedures that need to be changed to accomplish the goal or objective

ACTIONS - checklist, calendar, columnar presentation showing separate columns for Client, CPA, Broker, Bookkeeper, Lawyer, Insurance Agent, etc.

Back to Start of What To Do  

COST v. BENEFITS ANALYSIS

PROPOSAL

FACTS DISCOVERED & USED

COMPUTATIONS & REPORTS

TECHNICAL ANALYSIS WITH CITATIONS AND AUTHORITY

FORMS - agreements, contracts, trusts, tax forms, financial reports, management information reports, policies or procedures

REQUIRED ATTACHMENTS

Back to Start of What To Do  

FINAL STEPS

Overview - look at the steps required and the steps performed.  Are there unusual items?  Are there exceptions or adverse results of the procedures performed?  Find resolutions for all unusual or adverse items.

Compliance - has compliance "substantially" been met.  That is no "material" adverse results?

Math Check

Proof and spell check

Theory & overview by someone not performing the procedures

Close the case and archive it.

Back to Start of What To Do  

Forms and checklists

Back to Start of What To Do  

How to use the forms

Back to Start of What To Do  

TOP

Financial Accounting: Bookkeeping & Financials 

Click on the title to expand or collapse the topics

• Financial Accounting

  • Financial Statement Presentation

  • Notes to Financial Statements

  • How to Make Entries

  • What Kind of Records to Keep

  • Bookkeeping Methods - Cash, Accrual and Other

  • How the Business Entity Affects the Recording

Financial Statement Presentation

Back to Start of Financial Accounting: Bookkeeping & Financials

Notes to Financial Statements

Back to Start of Financial Accounting: Bookkeeping & Financials

How to Make Entries

Back to Start of Financial Accounting: Bookkeeping & Financials

What Kind of Records to Keep

Back to Start of Financial Accounting: Bookkeeping & Financials

Bookkeeping Methods - Cash, Accrual and Other

Back to Start of Financial Accounting: Bookkeeping & Financials

How the Business Entity Affects the Recording

Sole Proprietor

Corporation - C & S

Partnerships - General, Limited, Limited Liability Company, Registered Limited Liability Partnership or Company

Trusts

Tax Exempt

Back to Start of Financial Accounting: Bookkeeping & Financials

TOP

Compliance - what is required for protection, defense, etc.  

Compliance Checklist

Back to Start of What is required for protection, defense, etc.  

TOP

Alerts & Dangers - Risks, Asset Protection, IRS Defense 

Click on the title to expand or collapse the topics

• Alerts - Dangers - Risks - Asset Protection - Defenses (IRS, Etc.)

  • Action Checklist

  • Alerts & Dangers - Risks

  • Asset Protection

  • Your Defense

Action Checklist

Back to Start of Alerts & Dangers

Alerts & Dangers - Risks

Back to Start of Alerts & Dangers

Asset Protection

Back to Start of Alerts & Dangers

Your Defense

Back to Start of Alerts & Dangers

Tools - Spreadsheets - Documents - Reports - Checklists

Click on the title to expand or collapse the topics

• Tools

  • Spreadsheets & Math

  • Contracts, Trusts, etc.

  • Reports Required

  • Checklists - Deployment

  • Checklist - Monitoring

Spreadsheets & Computations 

Spreadsheet #1

Back to Start of Spreadsheets & Math

TOP

Contracts, Trusts, etc. 

Agreement #1

Back to Start of Contracts, Trusts, etc.  

TOP

Reports Required 

 Report #1

Back to Start of Reports Required

TOP

Checklists for Deployment  

 Checklist #1

Back to Start of Checklists - Deployment  

TOP

Checklist for Monitoring  

 Checklist #1

Back to Start of Checklist - Monitoring

TOP