Using a like-kind exchange to avoid gain recognition.Facts: John Henderson
The name John Henderson may refer to:
Because of his growing practice, John needs to double the existing facility's size. Unfortunately, renovating the building is not feasible (algorithm) feasible - A description of an algorithm that takes polynomial time (that is, for a problem set of size N, the resources required to solve the problem can be expressed as some polynomial involving N). , nor is there any available land near the present building. Thus, John will have to replace the existing property with a larger, more expensive facility. He is worried that if he purchases a new facility, he will end up with both properties and their mortgages for a long period. He is afraid of not being able to meet the debt service on both properties. Additionally, he does not believe he can pay the tax on the anticipated $600,000 gain from the sale of the existing facility and still be able to purchase a building large enough to meet his business needs. Issue: How can John meet his goals and avoid gain recognition? Analysis John's tax adviser tells him that if he can acquire another property in a like-kind exchange without receiving any boot, he can meet his desired results without triggering gain. John locates the property he wants to acquire. The owner is willing to take the existing facility in exchange, provided John makes a cash payment to equalize e·qual·ize v. e·qual·ized, e·qual·iz·ing, e·qual·iz·es v.tr. 1. To make equal: equalized the responsibilities of the staff members. 2. To make uniform. the properties' equity values. The existing facility has a $1.9 million FMV and a $1.2 million mortgage. The new facility has a $3 million FMV and a $2 million mortgage. John will give the owner $300,000 cash. Each party will assume the mortgage secured by the property received in the exchange. Although John receives relief from liabilities in the exchange, he also pays cash and assumes a mortgage. The following computes the boot John paid/received: Liabilities from which John is relieved $1,200,000 Liabilities John assumes (2,000,000) Cash payment (300,000) Net boot paid $(1,100,000) Thus, John does John Doe formerly, any plaintiff; now just anybody. [Am. Pop. Usage: Brewer Dictionary, 329] See : Everyman not receive any boot in the deal, so none of his realized gain Realized Gain A gain resulting from selling an asset at a price higher than the original purchase price. Notes: There may be tax consequences for a realized profit. ($600,000) is recognized. His basis in the new property is computed as follows: Basis of existing facility $1,300,000 Less: boot received 0 Plus: gain recognized 0 Plus: boot paid 1,100,000 Basis in new property $2,400,000 Exhibit 1 below provides a like-kind exchange worksheet See spreadsheet. worksheet - spreadsheet . Exhibit 1: Like-kind exchange worksheet (1,2) Name: -- Social Security No.: -- Description of property surrendered: -- Description of property received: -- Boat given: -- Boot received: -- Date of exchange: -- Gain realized (3): FMV of property and boot received $ -- Less: Adjusted basis of property and FMV of boot given (4) (--) Gain realized (not less than zero) $ -- Gain recognized (5): 1. Gain realized (from above) $ -- 2. Net boot received $ -- 3. Gain recognized (lesser of line 1 or 2) $ -- Basis of property received (3): Adjusted basis of like-kind property surrendered $ -- Plus: FMV of boot given (if any) $ -- Plus: Gain recognized, if any (from above) $ -- Less: FMV of boot received (if any) $ -- Basis of like-kind property received $ -- (1) Application of the like-kind exchange provisions is mandatory, rather than elective. (2) Like-kind exchanges are reported on Form 8824, Like Kind Exchanges. (3) Debt is considered "boot" in like-kind exchanges. When boot is both received (by the surrender of debt) and given (by assuming debt), it is netted to determine gain and basis. However, when boot in the form of cash or other property is also received and netting the debt results in boot "given," the excess boot given in the form of debt may not offset cash or other property received. (4) FMV of boot given is used, because gain or loss is recognized on the boot given (it is not qualifying property). (5) In some cases, Sec. 1245 recapture causes realized gain to be recognized. Editor: Albert Albert, German churchman Albert, 1490–1545, German churchman, cardinal of the Roman Catholic Church. A member of the house of Brandenburg, he became (1514) Archbishop of Mainz. B. Ellentruck, Esq. Of Counsel King & Nordlinger, L.L.P. Arlington Arlington, county, United States Arlington, county (1990 pop. 170,936), N Va., across the Potomac River from Washington, D.C. Arlington is a residential and commercial suburb of Washington. , VA |
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