This was originally posted by Shasso2000. It is a great post:

Great thanks to Shasso2000

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Like-kind exchange--an exchange of business or investment property for property of a like-kind,

(1)  Does not apply to property held for personal use, inventory, stocks, bonds, notes, intangible evidences of ownership, and interests in a partnership

(2)  Property held for business use may be exchanged for investment property or vice versa.

(3)  Like-kind means Same class of property.

(a)  Real property must be exchanged for real property; personal property must be exchanged for personal property within the same General Asset Class or within the same Product Class.  For example:

1]   Land held for investment exchanged for apartment building

2]   Real estate exchanged for a lease on real estate to run 30 years or more

3]   Truck exchanged for a truck

(b)  Exchange of personal property for real property does not qualify.

(c)  Exchange of US real property for foreign real property does not qualify.

(4)  To qualify as a like-kind exchange (1) the property to be received must be identified within 45 days after the date on which the old property is relinquished, and (2) the exchange must be completed within 180 days after the date on which the old property is relinquished, but not later than the due date of the tax return (including extensions) for the year that the old property is relinquished.

(5)  The basis of like-kind property received is the basis of like-kind property given.

(a)  + Gain recognized

(b)  + Basis of boot given (money or property not of a like-kind)

(c)  - Loss recognized

(d)  - FMV of boot received

(6)  If unlike property (i.e., boot) is received, its basis will be its FMV on the date of the exchange.

(7)  If property is exchanged solely for other like-kind property, no gain or loss is recognized.  The basis of the property received is the same as the basis of the property transferred.

(8)  If boot (money or property not of a like-kind) is given, no gain or loss is generally recognized.  However, gain or loss is recognized if the boot given consists of property with a FMV different from its basis.

EXAMPLE:  Land held for investment plus shares of stock are exchanged for investment real estate with a FMV of $13,000.  The land transferred had an adjusted basis of $10,000 and FMV of $11,000; the stock had an adjusted basis of $5,000 and FMV of $2,000.  A $3,000 loss is recognized on the transfer of stock.  The basis of the acquired real estate is $12,000 ($10,000 + $5,000 -$3,000).

(9)  If boot is received

(a)  Any realized gain is recognized to the extent of the lesser of (1) the realized gain, or (2) the FMV of the boot received

(b)  No loss is recognized due to the receipt of boot

EXAMPLE:  Land held for investment with a basis of $10,000 was exchanged for other investment real estate with a FMV of $9,000, an automobile with a FMV of $2,000, and $1,500 in cash.  The realized gain is $2,500.  Even though $3,500 of Boot was received, the recognized gain is only $2,500 (limited to the realized gain).  The basis of the automobile (unlike property) is its FMV $2,000; while the basis of the real estate acquired is $9,000 ($10,000 + $2,500 gain recognized $3,500 boot received).

(10)  Liabilities assumed (or liabilities to which property exchanged is subject) on either or both sides of the exchange are treated as boot.

(a)   Boot received--if the liability was assumed by the other party

(b)  Boot given--if the taxpayer assumed a liability on the property acquired

(c)   If liabilities are assumed on both sides of the exchange, they are offset to determine the net amount of boot given or received.

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EXAMPLE:  A owns investment land with an adjusted basis of $50,000, FMV of $70,000, but which is subject to a mortgage of $15,000.  B owns investment land with an adjusted basis of $60,000, FMV of $65,000, but which is subject to a mortgage of $10,000.  A and B exchange real estate investments with A assuming B $10,000 mortgage, and B assuming A $15,000 mortgage.  The computation of realized gain, recognized gain, and basis for the acquired real estate for both A and B is as follows:

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(d)  Boot given in the form of an assumption of a liability does not offset boot received in the form of cash or unlike property; however, boot given in the form of cash or unlike property does offset boot received in the form of a liability assumed by the other party.

EXAMPLE:  Assume same facts as above except that the mortgage on B old real estate was $6,000, and that A paid B cash of $4,000 to make up the difference.  The tax effects to A remain unchanged.  However, since the $4,000 cash cannot be offset by the liability assumed by B, B must recognize a gain of $4,000, and will have a basis of $69,000 for the new real estate.

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Joseph Kurtz exchanged land that he held for 4 years as an investment, with a tax basis of $36,000, for similar land valued at $40,000 which was owned by Adrian Flemming.  In connection with this transaction, Kurtz assumed Flemming $10,000 mortgage and Flemming assumed Kurtz $12,000 mortgage.  As a result of this transaction Kurtz should report a long-term capital gain of

Answers

A: $0

B: $2,000

C: $4,000

D: $6,000

Answer Explanations

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B.    Answer B is correct.  In a like-kind exchange of investment property, a realized gain is recognized to the extent of un-like (boot) property received.  Here, boot includes the assumption of a liability.  Since Flemming's assumption of $12,000 exceeds Kurtz's assumption of $10,000, there is net boot received of $2,000.

This answer is incorrect.  Refer to the correct answer explanation.

This answer is incorrect.  Refer to the correct answer explanation.